Starting a business with a trusted friend, family member, or investor may feel like a leap of faith. In Malaysia, however, too many small and medium-sized enterprises (SMEs) learn the hard way that trust alone is not a sound business strategy.
A handshake or verbal promise is no substitute for a legally enforceable business partnership agreement.
Getting a business partnership agreement brings immense advantages:
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Protects your business and personal assets from partner disputes
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Clarifies each partner’s rights, duties, and entitlements from the outset
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Builds confidence with banks, suppliers, and potential investors
But getting it wrong can have severe consequences:
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Disputes over money or decisions may end in legal battles
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Business operations can be frozen if partners deadlock or disappear
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Loss of control, reputation damage, and destroyed personal relationships
The truth is, the cost of doing it properly is low, affordable, and worth every ringgit. It can save years of pain and tens or hundreds of thousands in future losses. Below are six critical reasons every Malaysian SME should insist on a written business partnership agreement.
1. Clarifies Roles, Contributions and Expectations
Many business failures stem from unspoken assumptions. One partner believes they are the visionary, while the other assumes they are equal decision-makers. Another invests RM100,000 and expects 50% of the profits, while the working partner expects a salary and profit split.
In Mohammad Nazri bin Ibrahim v Loo Chee Yeong [2016] MLJU 1242, a dispute arose when one party claimed he was a 50% partner, while the other said he was merely an employee promised a bonus. There was no written agreement. The court found insufficient evidence of a true partnership and dismissed the claim.
A well-drafted agreement clarifies who does what, who contributes capital, who gets paid what, and what each person can decide unilaterally.
A lot of people think having a registered company (Sdn Bhd) solves this, but actually, shareholder arrangements and partnership roles are entirely separate legal concepts.
FAQ: What if our roles change later?
You can always amend a written partnership agreement by mutual consent. Flexibility is possible—as long as it’s written down.
2. Prevents Profit Disputes and Financial Misunderstandings
Many partners split profits based on verbal understandings. But profit includes multiple layers: net or gross? Before or after salaries? Include other benefits?
In one case involving a retail business (names confidential), a partner was reinvesting profits without informing the other, who believed cash was being siphoned. The absence of a partnership agreement led to months of hostility and eventual closure.
Section 26 of the Partnership Act 1961 provides that partners are entitled to equal shares of profits unless agreed otherwise. Without written terms, the law defaults to 50-50, regardless of actual effort or investment.
FAQ: Can I decide to draw a salary without a partnership agreement?
Not safely. Unless it’s agreed in writing, the law doesn’t recognise salaries for partners. You could be forced to repay those amounts.
3. Protects Against Partner Misconduct or Exits
A business partner might commit fraud, abandon the business, or make unilateral decisions that damage the company.
In Ong Han Keat v Liew Fook Chuan [2022] MLJU 1595, one partner continued to use the company name and collect payments after the other had exited. The court had to determine whether the partnership had dissolved and who was entitled to the remaining profits.
A written agreement allows you to:
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Set rules for exiting partners
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Impose penalties or buyout clauses
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Prevent unauthorised use of business name and assets
Without one, you’re left relying on outdated common law doctrines or implied terms—which rarely reflect your real business needs.
FAQ: What happens if a partner disappears or stops contributing?
Without a written agreement, there’s no automatic right to remove or replace an inactive partner. You may still be jointly liable for debts they incurred. A well-drafted agreement can include exit triggers—such as prolonged absence or failure to perform duties—and specify what happens to their share.
4. Avoids Family and Friend Fallout
Many SMEs are founded among siblings, spouses, or lifelong friends. But familiarity can blur expectations.
A salon in Shah Alam shut down after two best friends opened it together. One funded the renovation; the other managed daily operations. Profits weren’t clearly accounted for, and verbal agreements became contested memories. Their personal relationship never recovered.
When emotions run high, written agreements create objectivity. Section 4 of the Evidence Act 1950 gives more weight to written documents than oral testimony in disputes.
FAQ: Is it too formal to ask family or close friends to sign?
Not at all. In fact, it shows professionalism and protects the relationship. You can present it as a way to prevent future misunderstandings.
5. Manages Deadlocks and Decision-Making
In equal partnerships, deadlocks can easily happen—especially when partners have different views on spending, hiring, or the future direction of the business. Without a written agreement, there’s no built-in system to resolve those disagreements. This can lead to delays, frustration, or even a total breakdown in operations.
A well-drafted partnership agreement can set out:
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Who decides on daily matters vs major business decisions
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Whether certain decisions require both partners’ agreement
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A process for resolving disagreements (e.g. third-party mediator or advisor)
You don’t need to plan for every scenario—but having a basic decision-making structure can protect the business from being paralyzed when views differ.
FAQ: What if we both disagree and can’t move forward?
Your agreement can include a step-by-step process for resolving disputes, such as internal discussion timelines, mediation, or referring the issue to a trusted external advisor. It helps avoid prolonged deadlock and keeps the business running smoothly.
6. Provides Clear Exit and Succession Plans
What happens if a partner dies, becomes incapacitated, or wants to sell their stake?
A bakery in Johor Baru faced a crisis when one partner died without a will or agreement in place. His widow inherited the business interest but had no operational knowledge. The surviving partner was forced to negotiate with grieving family members while the business stalled.
A well-drafted agreement covers:
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What happens on death or disability
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Whether surviving partners can buy back the shares
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Whether insurance funds the buyout
These ensure business continuity, fairness to heirs, and financial stability.
FAQ: Can we include insurance in a partnership agreement?
Yes. Many agreements include a “key person insurance” clause where the business purchases insurance to fund buyouts in case of death or disability.
Conclusion
A business partnership agreement is not a luxury. It’s a basic necessity—even (or especially) among friends and family. The Malaysian legal framework is available to enforce your intentions, but only if those intentions are clearly written and signed.
For SMEs, the cost of doing it right is small compared to the devastation of doing it wrong. Don’t leave your business’ future to memory and goodwill.
Before entering any partnership, it’s wise to consult a qualified lawyer to draft or review your agreement. Every business is different, and a well-structured agreement ensures that your arrangement reflects your specific needs, goals, and risks.
