Partnership Agreement in Malaysia: A Guide for Business Owners
Starting a business together is often built on trust. A clear written agreement helps ensure the partners share the same understanding from the outset.
Starting a business with someone often begins with trust. You may be friends, siblings, relatives, or business partners who have known each other for years.
But when money, responsibilities and ownership are involved, verbal understandings may not be enough.
A Partnership Agreement helps the partners clearly set out their respective rights, responsibilities and expectations from the beginning.
What should a Partnership Agreement cover?
A properly drafted Partnership Agreement may address matters such as:
1. Capital contribution
How much is each partner contributing to the business? Are the contributions made in cash, assets, equipment or otherwise?
2. Profit and loss sharing
How will the profits of the business be divided? Will losses be borne in the same proportion?
For example, even if two partners contribute equal capital, they may agree to a different profit-sharing arrangement depending on their respective roles and responsibilities.
3. Roles and responsibilities
Who will be responsible for the day-to-day operations of the business? Who handles finances, employees, suppliers, marketing or client matters?
Clearly defining these responsibilities can help avoid disputes later.
4. Decision-making
Not every business decision should necessarily require unanimous consent.
The agreement can specify which decisions may be made by an individual partner and which major decisions require the consent of all partners.
5. Withdrawal or retirement of a partner
What happens if one partner wants to leave the business?
The agreement can provide a mechanism for the remaining partner(s) to purchase the outgoing partner's interest and determine how the value of that interest will be calculated.
6. Death or incapacity of a partner
Without proper arrangements, the death or incapacity of a partner may create significant uncertainty for the business.
A Partnership Agreement can set out what happens to the partner's interest and whether the remaining partners have a right to acquire it.
7. Restrictions and confidentiality
Partners may have access to confidential information, customer lists, pricing information and other commercially sensitive information.
The agreement can impose appropriate confidentiality obligations and deal with what a departing partner may or may not do after leaving the business.
8. Resolving disputes
Even partners with a good relationship can disagree.
Having an agreed procedure for dealing with disputes before a dispute happens can prevent disagreements from unnecessarily disrupting the business.
“We trust each other. Do we really need an agreement?”
A Partnership Agreement is not necessarily prepared because the partners do not trust each other.
It is prepared so that everyone understands the arrangement while the relationship is still good.
Many disputes arise not because either party intended to act unfairly, but because both parties had different understandings of what had originally been agreed.
Putting the terms in writing gives everyone a clear point of reference.
If you are starting a business with another person, it is worth considering a properly drafted Partnership Agreement before substantial money, time and effort are invested into the business.
Need a Partnership Agreement drafted or reviewed?
Eng Chambers assists business owners and partners with drafting and reviewing Partnership Agreements tailored to their capital contributions, profit-sharing arrangements, responsibilities, decision-making and exit arrangements.