Forming a Business Partnership: 4 Key Legal Considerations

by 15 September 2021Corporate & Commercial, Knowledge & Insights

Forming a Business Partnership - 4 Key Legal Considerations

When incorporating your startup in Singapore, one of the key things you’ll need to work out is what sort of business structure you’ll be adopting: sole proprietorship, partnership, or company.

Partnerships are businesses owned by two or more partners (partners can be individuals or corporations), and are legally referred to as “firms”. Partnerships can be General Partnerships, Limited Partnerships, or Limited Liability Partnerships.

There are a few benefits to incorporating partnerships, such as:

  • Fewer statutory controls compared to companies
  • Minimal administrative formalities which contribute to lower costs
  • Easy to dissolve and internal structure is very flexible
  • A high degree of privacy as there is no requirement to audit or publish accounts

Key considerations when forming a partnership

When incorporating a business partnership, it’s important that all partners agree on the following points:

1. Individual liability of partners

In a firm, there is no legal distinction between the owners and the business entity, which means that partners are personally liable for the company’s debts and obligations – unless otherwise stated in the Partnership Agreement. This is why it’s important to determine beforehand the extent of liability (limited or unlimited) that each partner bears.

2. How profits will be divided

To avoid any potential conflict, partners should agree on profit-sharing and remuneration. This will prevent any one party from demanding more down the road without the consensus of all other partners.

3. How to enact changes in business structure

Because of the flexible nature of partnerships, partners can easily be removed or added with minimal administrative procedures. However, partners should agree beforehand on what these procedures are. For example, are new partners required to contribute cash capital or sweat capital to join? How many signatures are required before a partner is removed? What is the buyout procedure? These should be laid out in black and white in the Partnership Agreement.

4. What follows should the partnership be dissolved

To end a partnership, there are two stages: dissolution followed by winding up. This is important to note because dissolution is not the end of legal obligations – partners still owe each other fiduciary duties during the winding-up process. It’s important that partners agree on how to proceed after dissolution, for example, how to settle unfinished transactions, complete creditor payments, or liquidate remaining assets.

Main elements of a Partnership Agreement

In addition to the 4 key considerations outlined above, other things that a Partnership Agreement should outline are dispute resolution, terms that will cause termination of the partnership, and valuation of partnership shares. The exact elements can be customised with the help of an attorney.

Is it important to have a Partnership Agreement?

Yes, it is highly recommended to have a written agreement in place before forming your business partnership. This ensures minimal grey area for miscommunication or misunderstandings about the partnership arrangement, which is especially crucial in the event of disputes such as an alleged breach of contract by one of the partners.

Oral agreements are considered legally binding, but relying solely on them may leave room for discrepancies.

Should there be no Partnership Agreement or if the agreement is not exhaustive enough, the relationship between partners will be governed by the Partnership Act.

Protect your legal and business interests by consulting a commercial lawyer

For a partnership to work successfully, it is crucial to ensure that everyone is on the same page. Beyond being about legal clarity, the process of drafting the agreement also forces all partners to consider these very important aspects of entering into business together before moving forward. Our team of highly experienced and professional corporate lawyers can help you draft a comprehensive Partnership Agreement before conducting business in Singapore. Contact our law firm today with any questions.

About the author

About the author

Jonathan Wong

Jonathan is the Founder and Managing Director of Tembusu Law. He is also the founder of LawGuide Singapore, a prominent legaltech startup which successfully created and launched Singapore’s first legal chatbot in 2017.

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