Do I Need a Partnership Agreement?

The short answer is yes, unless you are happy to be governed by a piece of legislation that is over 125 years old!

What is a Partnership Agreement?

A partnership agreement is the agreement between at least two partners, who are carrying on a business in common with a view of profit, which governs and determines the relationship between them. The agreement can be express or implied, or written and unwritten. The agreement itself will define the rights and obligations between the partners themselves.

It is usually more beneficial to all partners if the agreement is documented in writing, because this will help clarify the relationship between the partners, and help remove or reduce ambiguity. Furthermore, as the Partnership Act 1890 (PA 1890) is an old and outdated piece of legislation, despite it covering some of the groundwork for setting up a partnership, it does not cover all of it. Therefore, it is advisable for partners to enter into a formal written partnership agreement. If there is not an agreement, and no fixed term has been determined, the partnership will usually be determined as a ‘partnership at will’.

What can happen if I don’t have one?

In the absence of a partnership agreement, the PA 1890 will rule the relationship between the partners of a partnership. This may be something that you are happy with, but when you learn what it says, you might have a change of heart.

The PA 1890 sets out default rules for a partnership, and a few of them are mentioned below:

• All partners share in the profits and capital, as well as the losses of the firm, which may not be appropriate if partners are putting in different amounts when setting up the partnership. If you are bringing more money to the table, you may feel that you should be entitled to a higher share of the profits.
• The obligation of the firm to indemnify every partner in respect of payments made, or liabilities incurred by them, in the ordinary course of the firms business or which was necessary, to preserve the business or property of the firm.
• The entitlement to interest on advances to the partnership.
• A requirement that all partners take part on the management of the firm.
• In the absence of an agreement, a single partner has a very wide authority to bind the firm (without the requirement of consent from other partners), which stretches to hiring and firing employees, buying and selling goods, or drawing cheques.
• Without an agreement, a partnership can be dissolved when a single partner leaves, dies, or is declared bankrupt. Furthermore, a partner can unilaterally decide to terminate the partnership if the partnership is a ‘partnership at will’, by simply giving notice to all partners. This can have a rather ruinous effect on business, which is why it is important to cover this off in an agreement.

What can I cover in a Partnership Agreement?

Several aspects that are implied by the Partnership Act 1890 can be excluded if a well drafted and written agreement is entered into. As mentioned above, the effects of the PA 1890 can have a catastrophic effect on the running of a partnership if there are no clear processes that are required to be followed when leaving a partnership. A partner may want to retire, and if there is no agreement, this automatically dissolves the partnership. An agreement can implement a process that needs to be followed and prevent dissolution of the partnership.

A partnership agreement can also help determine the drawings of each of the partners, whether they are shared equally or whether they are in different proportions, as well as capital amounts and monthly drawings. This removes the implication that partners share in capital and profits equally.

A written agreement can also clarify how a partner joins the partnership, and how one can leave, while preserving the partnership  and stopping the dissolution (which would occur in the absence of an agreement).

Voting capabilities and general day to day management decisions can also be covered within an agreement, which is useful if you want certain types of decision making to be restricted, such as the purchase of expensive assets, or the hiring and firing of employees.

Partnership assets can bring with them risk. Under the PA 1890, assets that are brought into the partnership for the purpose of running the business, or those acquired, will generally be classed as partnership property or partnership assets. This can be an issue, as if you as an individual owned land, and such land was used by the partnership for whatever reason, then this could be classed as a partnership asset. The risk here, is that in situations of insolvency, such assets can be used to pay creditors if they are partnership assets, or if the asset is increases in value, the partnership will be entitled to that increase, and not the partner who owns it in their own name. It is important to have a partnership agreement that effectively and clearly clarifies which property will be classed as partnership assets, and which aren’t. Usually, the accounts of the partnership will make clear what are and what are not partnership assets, but there have been occasions where the court has not accepted the evidence of the accounts, which is why it is imperative you have a partnership agreement that helps define this.

Where can I get one from?

The Corporate and Commercial team at Wilson Browne Solicitors have extensive experience in advising individual partners or a partnership, and will happily assist you in relation to any partnership agreement enquiries that you have.

For a confidential and no obligation initial discussion about how we may be able to help, please contact the Corporate and Commercial team at 0800 088 6004.