Partnership agreement in Malaysia is important to the success of a partnership. Our article explains the partnership types, benefits, and the main terms to be included.
Understanding Partnership Agreement Malaysia
A partnership agreement in Malaysia is a legal document signed between several partnership owners that records the arrangements between them on the running of the partnership.
It is like a shareholder agreement in Malaysia, where that contract records an agreement between several shareholders in a company.
Both agreements are different types of business partnership agreements. In Malaysia, partnerships, sole proprietors, and companies are different types of business vehicles used by small and medium-sized enterprises, especially startups for business ventures.
Our government initiatives and framework have focused on providing resources for successful business collaboration and venture, as these businesses are important for the country’s growth.
Before starting any partnership business, there are two types of partnerships: general and limited partnerships. General partnerships are governed under the Partnership Act 1961. On the other hand, a limited liability partnership is governed under the Limited Liability Partnership Act 2012.
Benefits of Having Written Agreements
If there is no agreement between the partners, the related law, that is the related partnership acts in Malaysia, will apply. These are the benefits of having a written agreement including:
Clarity on management and decision-making process
One of the purposes of having the agreement is to have an agreed arrangement on the business operations; especially on the role and responsibilities of each partner and the decision-making. This minimises misunderstandings and provide guidance on day-to-day operations
Reference During Disputes
In the event there are conflicts between them or any deterioration in the business relationship between the business partners, then the agreement can be a reference on how to resolve the disputes.
Profit-Sharing and Exit Plan Clarity
It provides clarity and understanding on the profit-sharing and exit plan, especially on the distribution of the partnership property.
Legal Framework and Requirements
Before one has a partnership agreement in Malaysia, one ought to know some legal requirements which are:
Compliance
The agreement must comply with the applicable partnership acts in Malaysia. General partnerships must comply with the Partnership Act 1961 while limited liability partnerships must comply with the Limited Liability Partnership Act 2012.
Registration
The partnership must be registered with Companies Commission of Malaysia (SSM) beforehand. This involves submitting necessary documents and paying fees.
Key Elements of a Partnership Agreement
It is not recommended to use any partnership agreement Malaysia sample as they may not be suitable for your case. Key elements and clauses of successful partnership agreements include:
Partnership and partners’ information and details
The first key terms are the details of the partnership such as name, address, and business nature. Also, it includes details of the individual partners such as full name, address, and identification details.
Duration of Partnership
Next is the period where the partnership will last. This could be for a fixed time or usually until something happens, such as the dissolution of the partnership.
Capital Contributions
Next, a solid business partnership agreement should state the amount of capital contribution by the partners. Capital contribution usually reflects the voting rights and profit-sharing between the partners.
Furthermore, it should state the amount of loans given by the partners to the partnership which should not be counted as part of capital and method of repayment.
If there is any need for increased capital in the future, it should state the proportion of capital to be contributed by each partner.
Roles and Responsibilities
This includes the roles and responsibilities of the partners in the management and operations of the business which include:
Decision-making: Appointment of managing partner (if any) and how the meeting to run and decisions are made (how many partners must attend the meeting and pass votes).
Furthermore, it includes specific roles in the business such as contract negotiation, business development, support roles, and other roles.
Act in best interests: This includes obligations and duties of the partners to provide information to the other partners regarding the business and not accept commissions against the interests of the business.
Restriction: This includes the duties of partners not to pledge the credit and use the business name or deal with anything related to the partnership other than for its business activity.
In a general partnership, the partners are jointly and severally liable for the debts of the partnership. That means each partner is personally responsible for the debts of the partnership, including those losses incurred from the mistake and omission of the partner. Having a ‘sleeping partner’ in a ‘silent partnership agreement’ does not prevent this.
However, this is not the case for limited liability partnerships where each partner is generally liable up to the debts of the partnership. Choosing the right partners is important as failure in choosing the right one can cause issues later on.
Accounts and Finance
This includes where the account books are to be kept and the rights of the partner to view and inspect them. It also states the required number of signatories of the cheques and who can do so.
Dispute Resolution
A good partnership agreement should also state a dispute resolution mechanism to resolve disputes including minor disagreements. This dispute resolution process includes mediation, arbitration, and litigation. Each method has its pros and cons.
Profit Distribution
Next is the distribution of profits and the sharing of losses between the partners. Usually, it follows the ratio of capital contribution and their contributions to the business but the partners can discuss and agree on different arrangements.
This is especially true when some partners are involved in day-to-day operations while others are only involved in contributing monies as capital.
It should also state when the partners can make drawings from the partnership, that is when the profits are distributed. However, the amount and frequency of the drawing should be balanced with the need for capital for growth in the future.
Introduction & retirement
These include the circumstances where a partner can exit from the partnership. This includes some situations when there is death, bankruptcy, or disqualification of that partner from professional membership, and the other partners can give notice to remove that partner. Other situations include the voluntary resignation of the partner.
After the removal of the partner, the subsequent process includes the right of the remaining parties/partners to buy over the exiting partner’s share in the partnership at a predetermined formula, after deducting the business debts.
These processes are to ensure the continuity of the business and minimise any interruptions or implications on the partnership in providing services.
It should also state the requirements for the introduction of a new partner, that it needs a certain number of votes from the existing partners.
Dissolution Clauses
The other provisions include when the partnership is to dissolve. This usually happens when a certain number of partners give notice to dissolve the partnership and after the expiry of that period, the partnership is dissolved.
After the dissolution, the assets of the partnership are usually used to pay off the debts, and capital contributions of the partners, before the remaining are paid to the partners based on the agreement. This will minimise any potential disputes between them.
You can engage a corporate lawyer in Malaysia to prepare this business agreement. They are conversant with business law and able to prepare a comprehensive partnership agreement. Any partnership agreement template Malaysia may not be suitable for your individual situation.
Conclusion
Partnership agreement in Malaysia is important to set expectations and clarity in the management of the partnerships. If you are looking for expert legal advice or a lawyer firm in Kuala Lumpur, you can contact us and we can help you with it.
Frequently Asked Questions
1. Is partnership agreement compulsory in Malaysia?
No, it is not compulsory in Malaysia. However, it will be advisable to have one so the partners are clearer on the management of the partnership and profit-sharing between them.
2. What is included in a partnership agreement?
Usual terms include partner details, capital contributions, and profit-sharing ratios. Other terms include decision-making processes and procedures for resolving disputes and dissolving the partnership.
3. What are the requirements for a partnership agreement?
First, it must be in writing. Then, it must comply with the related partnership law, that is Partnership Act 1961 or Limited Liability Partnerships Act 2012 and contains the important terms.
4. How many partners can be in a partnership in Malaysia?
There are usually at least a minimum 2 partners to be in a partnership.
