These should document the way the partners connect or break their partnership. They also usually cover certain matters of governance.
Business owners who carry on business in a partnership, with other co-owners may not appreciate the obligations, legal and otherwise, and emotional difficulties that can occur when these structures end or because of a principal leaving or dying or becoming insolvent.
Partnership agreements can contain terms dealing with bankruptcy,separation, death, or disability; however, in most cases no proper agreement exists to buy-out or sell-out to the remaining partners or shareholders in the event of such an event!
Partnership agreements are not always comprehensive enough to cover all the needs and requirements of relevant ownerships.
It is quite normal for business operators to use Buy-Sell Agreements to ensure they can effectively transfer ownership of the business in the event of an event as stated. Such agreements should contain formulae and procedures for the buy/sell and the terms of any sale and purchase that arises. However, it is possible that such provisions may be contained in the partnership agreement. It is then necessary to ensure that the partnership agreement works alongside the Buy-Sell Agreement.
The buy/sell agreements also most often have insurances working in tandem with the buy/sell obligations insurances like life, trauma, and total and permanent disability. These assist in the meeting purchase and termination payment obligations.
A well-drafted Buy-Sell Agreement can usually give the most tax effective arrangement when that arrangement is implemented.
Where insurance is involved, the tax effectiveness of the outcome can depend on a number of factors including the ownership structure for the insurance. Principals should consider the range of ownership options available, including:
- Joint ownership;
- Entity-business ownership;or
- Insurance trust
For more information regarding Partnership Agreements, contact us on (02) 4941 8999