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Partnership Agreements: Essential arrangement or unnecessary chore?
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Written by Marina Akram, Solicitor, Commercial Litigation at Silverback Law
Partnerships are governed by the Partnership Act 1890 (‘PA 1890’).In order to create a partnership, two or more people may form an arrangement with the intention to carry on a business together with a common view to share profits. Their partnership will be subject to fulfilling the criteria of the definition of a partnership in PA 1890. Whether or not the criteria has been met is a question of fact.
The partnership cannot acquire its own rights, obligations or hold property in its own right, as it is not a separate legal entity. Therefore, it is worth noting that each partner owes a duty of good faith to their fellow partners in all partnership dealings. Each partner is an agent of the partnership and can possibly bind the partnership, and the other partners, by any action undertaken in the ordinary course of business. Similarly, a partner is jointly liable with the other partners for all obligations and debts that the partnership may incur while they are a partner.
What is a Partnership Agreement?
A Partnership Agreement is a written agreement that defines the partnership, the relationship between the partners and their contractual obligations.
The PA 1890 preserves the law relating to partnership but does not provide a complete code of partnership law. Therefore, a Partnership Agreement provides the framework for the day-to-day running of the business, likely areas of dispute between partners and procedures for dealing with them should they arise.
What should a Partnership Agreement include?
A Partnership Agreement can be drafted at any time and to meet each partnership’s needs, and may cover matters as follows: –
- Category of business
- Description of partnership’s share, assets, authority, liability (restrictions and allowance)
- Accountants name, bank name and premises
- Description of all partner’s duties and responsibilities to the partnership and the other partners
- Capital and income allocation (inc. full time/part time share agreements)
- Holiday, maternity/paternity pay and leave, sick pay and other entitlements for partners
- Use of business vehicle, if any
- Distinguishing between partnership property and property that personally belongs to an individual partner
- Retirement/ Expulsion /Termination of the partnership
- Decision making processes and method of settling disputes.
Importance of a Partnership Agreement
The PA 1890 sets out a number of default provisions explained below that will apply to the operation of a partnership if no specific agreement is entered into.
- all partners are to share equally in the capital and profits and contribute equally to losses
- the partnership must indemnify any partner for payments and liabilities incurred in the ordinary and proper conduct of the partnership’s business
- every partner may take part in the management of the partnership business
- no partner is entitled to any remuneration for acting in the partnership business
- no person may be introduced as a partner without the consent of all existing partners
- any differences as to ordinary matters connected with the partnership business may be decided by majority vote but a change in the nature of the business requires unanimous consent
- no majority of the partners can expel any partner unless a power has been conferred by express agreement
- where no fixed term has been agreed for the duration of a partnership, any partner may terminate the partnership by giving notice to the other partners.
The standardised approach can be problematic and unfair. Having a Partnership Agreement can help avoid conflict by pre-empting any potential disagreements.
Common Problems with an Informal Partnership Agreement
By way of an example, in a two people partnership with an informal agreement, the first partner invests money into the business, carries out more work, pays the utilities, and assists the second partner. In absence of a Partnership Agreement, the default position is that both partners have an equal share, even though the first partner has invested more money, knowledge and time, the assets of the partnership may be shared equally among the partners, which may be deemed as unfair split of the assets.
Benefits of having a Partnership Agreement
A Partnership Agreement can benefit in various ways:
- It offers clarity as regards to concerns on distribution of profits
- It reinforces any unwritten rules as regards the business therefore decreasing the possibility of misinterpretation between partners
- A written agreement can assist to prevent expensive and time-consuming court proceedings in the event of a disagreement
- A Partnership Agreement will override the default provisions of the PA 1980
Conclusion
Many partnerships, especially family-owned businesses, do not have a Partnership Agreement. A Partnership Agreement should be regarded as an investment therefore we strongly advise that all partnerships/businesses should have a recent and carefully considered Partnership Agreement which is tailored to their business needs.
If you don’t have a Partnership Agreement and your business has been operating for a number of years, it is still not too late to formalise the requirements of your business in a written agreement. Further, if you have a Partnership Agreement, it should be checked frequently, especially if there is a change in the Partnership.
For further advice on Partnership Agreements, please contact Marina Akram at Silverback Law, Commercial Litigation Team on 0844 967 2700 or email
marina.akram@silverbacklaw.co.uk.
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