Do not ignore the Partnership agreement

Having a business partner is the first step in building a business. Usually, in the early stages, there are not many problems

because both parties view everything positively and trust each other.

However, as time goes by, regardless of whether your business is making a profit or incurring a loss, issues between partners begin to arise.

These issues can include unequal workloads despite equal benefit sharing, growing distrust, and forgetting initial agreements because no contract was made, among others.

Today, we would like to introduce you to the aspects of a partnership agreement that you should be aware of before starting a business.

Table of content

• Are Verbal Agreements and Gentlemen’s Agreements Legally Binding?
• How to do the partnership agreement?
• What is an unregistered business agreement?
• What should be in the partnership agreement?
• General Partnership (Juristic Person)

Are Verbal Agreements and Gentlemen’s Agreements Legally Binding?

First, let’s understand the concept of a “partnership agreement.” Many businesses start based on mutual trust without any formal agreements between partners or owners.

Legally, this is not prohibited. Our laws do not intend to complicate the process of starting a business; therefore, there are no mandatory requirements for partners to formalize their agreements in writing.

Thus, even “gentlemen’s agreements” or “verbal agreements” can be legally enforced.

However, based on our experience, when disputes arise, even before going to court, one party often “forgets” what was agreed upon or discussed, taking advantage of the lack of a written agreement.

This can lead to one party saying whatever they want.

The absence of a written contract poses a significant risk at the partnership level.

How to do the partnership agreement?

A partnership agreement is a type of contract that the law does not require to be registered publicly.

Therefore, each partner can create and keep the agreement privately without needing to register it with the Department of Business Development or any other governmental agency.

However, if you are planning to create a partnership agreement, it is advisable to seek the help of someone experienced in drafting such agreements or a lawyer specializing in this field.

This ensures that the rules and provisions in the partnership agreement are well-defined and beneficial.

A partnership agreement is not just a record of investment or business operations; it should also serve as a guideline for resolving various situations that may arise.

When issues occur, partners can refer to the agreement to address and resolve those problems based on the initial terms agreed upon.

What is an unregistered business agreement?

Unregistered partnerships are among the most problematic business arrangements.

Without regulatory guidelines or formal registration requirements, these partnerships often rely on verbal agreements, lacking the formal documentation necessary for legal proceedings.

This informality can lead to disputes, especially when business dealings are with close associates, making it difficult to distinguish between serious conversations and casual remarks.

As a result, the practice of creating “unregistered partnership agreements” is becoming more popular to mitigate these issues.

Examples of unregistered partnership businesses include pooling money with friends to sell clothes online, setting up a market stall, or opening a BBQ restaurant with friends.

Certain businesses benefit from the flexibility and cost savings of not registering as a limited partnership or legal entity, especially in the early stages.

However, it is crucial to at least have a partnership agreement in place. This recommendation is to ensure that:

The roles and responsibilities of each partner are clearly defined.
There is a written record of the terms agreed upon, which can be referenced if disputes arise.

Legal protection is provided to all parties involved.
Whether the business succeeds or fails, challenges are inevitable.

Having a written partnership agreement can help navigate these challenges more smoothly.

“Because whether the business thrives or not, problems are bound to arise.”

What should be in the partnership agreement?

The law does not prescribe a specific format for partnership agreements, but there are essential points that should always be agreed upon:

• All Partners Should Sign the Agreement
  Every partner must enter into and sign the agreement.
• Investment Amount and Share Proportion
  Clearly define the amount of investment and the proportion of shares for each partner.
• Management Authority and Organizational Changes
  Specify the management authority and the power to change the organizational structure.For instance, any expenditure exceeding a certain amount must be approved by all partners.
• Salaries, Income, Dividends, and Benefits
  Outline the distribution of salaries, income, dividends, and other benefits.
• Breach of Contract
  Establish the consequences and procedures if any partner breaches the agreement.
• Termination of Agreement
  Define the conditions for terminating the agreement, the effects of termination, and the terms for buying back ownership from other partners.
• Force Majeure
  Include a clause to address unforeseen circumstances that might affect the partnership. Etc.

These points help ensure that all partners have a clear understanding of their roles, responsibilities,

and the terms of their partnership, reducing the risk of disputes and misunderstandings.

General Partnership (Juristic Person)

Understanding the importance of having a partnership agreement is crucial.

Many people tend to focus only on unregistered businesses and might think that businesses registered as juristic persons (which are legally required to register) do not need a partnership agreement.

This is a misconception.

The government requires registration only for essential details needed by those who may contact the business, such as who has decision-making authority and the types of shares held by each partner.

However, it does not specify the terms and conditions between the partners themselves.

While the law outlines several duties and rights among partners, many partners are unaware of these provisions, and they may not be suitable for every business.

Therefore, even for registered general partnerships or other types of juristic entities, having a partnership agreement is still necessary.

As a lawyer who has handled many partnership disputes, I strongly recommend that every business should have a partnership agreement in place.

Disputes with external parties, customers, or even employees often do not affect the future of the business as much as disputes between partners.

Such internal conflicts usually do not end well.