If you are already operating a business in a partnership, or you intend to do so, it is crucial that the basis of the relationship between the business partners is set out in writing in a formal partnership agreement.
In the absence of a formal partnership agreement your partnership will be governed by the provisions of the Partnership Act 1890, which, while providing limited guidance for the governance of a partnership, will not provide your business with the flexibility and security afforded by a formal agreement.
Set out below are some of the issues which need to be considered by the partners when you set up a partnership and which should be addressed in detail in a partnership agreement.
Duration of the Partnership
A partnership can be for a fixed period or for the life span of its partners. It may be desirable for the partnership to be brought to an end by any partner giving notice or by the happening of a certain event, such as the death, retirement, expulsion or bankruptcy of a particular partner.
Alternatively, and more commonly, the partners may not wish the partnership to end on the death of a founding partner and so succession provisions are often included.
The partnership agreement should specify how much capital each individual partner is expected to provide for the business initially and in what proportion each particular partner will be expected to contribute towards any additional capital funding requirements.
Profit and Losses
As with the capital contributions, thought needs to be given as to what proportion of any profit or loss a particular partner will be entitled to or responsible for. Without an agreement, partners are entitled to split profits equally but are also required to contribute towards any losses equally, irrespective of their initial capital contributions. This is not always desirable for either senior or junior partners.
The agreement will also need to provide for whether partners are to be allowed to take drawings from the partnership on account of profits or if they will only be allowed to make drawings in respect of actual realised profits.
Relationship between Partners
The agreement should deal with:
- the actual authority of any individual partner – unless specified, any party held out as a partner will have the authority to bind all members of the partnership;
- who has what voting rights and to what these relate; and
- a mechanism for resolving disputes between partners.
Exit of a Partner from the Business
The agreement should contain provisions as to if and when partners are allowed to retire, as the Partnership Act does not allow for this, resulting in a dissolution or winding up of the partnership business if agreement cannot be reached when the issue arises.
When and in what circumstances a partner can be expelled and what happens to their share of the partnership in such circumstances also needs to be addressed in the partnership agreement.
The majority of disputes that arise between partners in business, at the very least, could have been resolved by reference to a properly drafted partnership agreement, if not in fact avoided entirely.
Many partnerships make the mistake of considering that a formal written agreement is not necessary at the outset of their partnership either because of cost or because they cannot envisage circumstances when they will have need of such a framework.
However, from our experience at Oliver & Co., we know how expensive and destructive, partnership disputes can be. Our specialist lawyers can offer you practical advice and a partnership agreement tailored to the needs of your business for an agreed fixed fee.
This money, invested in a partnership agreement at the outset, is never wasted and will provide your partnership with the confidence and security to move forward.
Contact Tim Polding to discuss your requirements further.
Call and speak to a member of our team on 01244 312306