If you set up in business with one or more other people
but do not wish to set up a limited company, a
partnership arrangement will be deemed to exist at law
without the need for a formal contract. However, whilst a
written partnership agreement is not required to form a
partnership, if you wish to avoid uncertainty and the
automatic application of potentially unsuitable statutory
law, a formal agreement is a wise investment.
What happens if we donĄ¯t sign a Partnership Agreement?
In the absence of a written agreement, the provisions of
the 1890 Partnership Act will apply. In essence, these
state that all the partners are equal and share profits,
losses, start-up and running costs as well as the
workload equally. Whilst the provisions are intended to
provide an equitable framework for running your
business, in reality, there are significant implications. For
example;
- all partners will be entitled to share the profits equally
regardless of how much capital, effort or skill they bring
into the business
- any partner can bring the partnership to an end just by
giving notice to all the other partners and the partnership
will automatically dissolve if a partner dies
- all partners will be jointly and severally liable for the
liabilities incurred by the company. This means that if one
partner takes on a commitment and fails to deliver on it,
you will be equally liable to remedy the situation. And if a
debt cannot be paid, then the creditor may pursue each
of you individually, meaning that one of you may be
forced into the position of paying the whole debt by
yourself
- should a partner get into financial difficulties then his or
her creditors can take assets from the partnership to
settle them
- all partners will be considered "agents" of the business
and so can act on behalf of the other partners. This
means an individual may enter into contractual and
financial arrangements which are not good for the
business, but these will be binding
- all partners have an equal say in the business, which
means that it can take time to reach decisions.
Unresolved disputes may result in the break down of the
business.
What benefits will a Partnership Agreement offer?
A partnership agreement will provide a written structure
for your business clearly setting out each partner's
responsibilities, rights, profit/liability sharing, rules
relating to business entry and exit, and also the terms on
which disputes are resolved and the partnership can be
terminated. Carefully drafted, it will ensure that you have
a common vision for the business with mutually agreed
goals. Critically, it will help avoid costly
misunderstandings and conflict.
Key areas to cover in your partnership agreement
include:
a) ownership interests, taking into account any cash,
assets, loans or investments made by individual partners
b} salaries and compensation: how will profits or losses
be allocated?
c} how the partnership will be managed
d) each partnerĄ¯s specific responsibilities within the
business, and what level of performance is expected from
them
e) whether partners expected to make a full-time
commitment to the venture, or are permitted involvement
in other business activities
f) what processes should be followed if one partner
wants to leave the partnership or a new partner is
admitted
g) whether partners will be allowed to sell their interests
in the business to outsiders and, if so, how will their
share be valued
h) on what grounds a partner can be expelled from the
partnership (e.g. misconduct, non-performance of duties)
How do I put a Partnership Agreement in place?
While there are many internet sites offering seemingly
cheap pro forma partnership agreements, this can be a
false economy for several reasons:
1) there are three different kinds of partnership: general
partnerships, limited liability partnerships and limited
partnerships ¨C you need to be sure that you set up the
appropriate vehicle for your needs;
2) no two partnerships will be alike in terms of specific
requirements;
3. you are unlikely to reach amicable consensus on an
agreement without involving an impartial third party
advisor;
4) without using a solicitor, you canĄ¯t be sure that the
agreement complies with partnership laws.
A better way to save money is to do some preparation
before instructing your solicitor: get together with your
partners and compile a list of provisions that you wish to
include in your partnership agreement. Your solicitor will
then have a good starting point from which to clarify your
requirements and draft a suitable agreement. However,
since one lawyer cannot represent the interests of all
partners, each partner will need to instruct their own
solicitor to review the final document on their behalf.
