Why you MUST have a Partnership Agreement

Most people who decide to form a partnership are completely unaware that the legislation governing such arrangements was enacted in Queen Victoria’s reign. That’s right, the Partnership Act 1890 came into force at a time when people were writing business letters with fountain pens and ‘social media’ consisted of ladies making morning calls for tea and gossip. It is extraordinary to think that an Act governing a common business arrangement has not been updated in over 130 years, but there we have it.

What is crucial is that anyone entering into a traditional partnership understands the consequences of not having a Partnership Agreement which overrides the legislation, namely, you will be subject to laws that were drafted one year before the telephone line between London and Paris was connected.

Under the Partnership Act 1890, a partnership is defined as the relationship that exists between two or more people carrying on a business in common with a view to profit. There are no formalities, such as registration or a written agreement, needed to form a partnership. Therefore, whether or not a partnership exists is a matter of fact rather than a determination by the individuals themselves. If there is a dispute over whether parties are in a partnership, the Court will examine the substance of the parties’ business arrangements, as opposed to their intentions.

Not having a Partnership Agreement in place can be calamitous, especially if one partner decides to call it quits and resign. Under the Partnership Act 1890 any partner, following an undefined time, has the right to dissolve the partnership with no notice. Furthermore, no new partner can join the firm without the agreement of the entire partnership, which could involve dozens of people who struggle to agree on the type of biscuits to buy for the staffroom.
Under the Partnership Act 1890, the death, resignation, or bankruptcy of a partner results in the immediate demise of the partnership. As a result, if no Partnership Agreement is in place, a perfectly profitable business could be ruined.

In addition, if one partner decides to resign, the lack of a formal agreement means there is no process for governing their exit. Matters such as notice periods, valuation of interests, and procedures for transferring ownership and assets are left up in the air, supplying the perfect recipe for disputes and the potential of expensive court action.

The only way to avoid having to follow the provisions of the Partnership Act and all the risks this entails, is to have a professionally drafted Partnership Agreement in place that deals with the default requirements provided by the Act.

A well-drafted Partnership Agreement should include the following:

• The name and purpose of the partnership.

• The names and contact details of each partner.

• The contributions made by each partner, including any capital, assets, and other resources (for example intellectual property rights).

• How profits and losses will be shared among the partners. Common approaches include equal sharing or proportionate distribution based on capital contributions or agreed-upon percentages.

• The authority and responsibilities of each partner. The agreement may also provide for a managing partner or establish a voting mechanism for major decisions.

• A traditional partnership involves unlimited liability, meaning partners are personally liable for the partnership’s debts and obligations. However, the agreement may include provisions for indemnification or limits on individual partner liability. If you wish to limit the liability of each partner, you need to use a Limited Liability Partnership (LLC) structure.

• The conditions under which the partnership can be dissolved, the distribution of assets in such an event, and the winding-up process.

• What happens if a partner resigns or dies.

• The appointment of new partners, including the capital and resources they must inject into the partnership.

• Restrictive covenants that mitigate the risk of a partner from setting up in competition after they have resigned or been dismissed.

• Provisions for resolving disputes, such as mediation or arbitration, to avoid costly and time-consuming litigation.

To avoid the risks of having your business governed by antiquated legislation, a Partnership Agreement is a must-have. A well-drafted document will set up a clear framework for the partnership’s operation, minimise the risk of disputes, and provide mechanisms for resolving conflicts if they arise. Although investing in legal advice may seem an extravagance when you are just starting out on your partnership venture, if problems arise (as they surely will do) everyone involved will be grateful that they invested the time and money in putting a comprehensive Partnership Agreement in place.

To find out more about any matters discussed in this article, please email us at info@43legal.com or phone 0121 249 2400.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article, please contact 43Legal.