If your business is run by two or more partners, it is vital to have a properly drawn up written partnership agreement, even if your partners are also your family.
A written partnership agreement is a legal document that sets out the rules of the partnership, helping to avoid conflict which may later arise between partners. Where the terms of a partnership are not clearly set out and recorded, disputes may arise over ownership division, the roles and responsibilities of the partners, and the distribution of assets upon termination of the partnership.
There are key default provisions under the Partnership Act 1890 that will apply to the operation of a partnership in the absence of any specific written agreement to the contrary. For example:
- All partners are to share equally in the capital and profits and contribute equally to losses – this may not be appropriate, for example, when one partner has contributed more capital than another.
- The partnership must indemnify any partner for payments and liabilities incurred in the ordinary and proper conduct of the partnership’s business – this provision is inconsistent where partners expect there to be a limit on another partners ability to make certain capital commitments, or decisions of significance, without the unanimous consent of all partners.
- Every partner may take part in the management of the partnership business – this is not a suitable provision where day-to-day management is delegated to a managing partner.
- No majority of the partners can expel any partner unless a power has been conferred by express agreement – without express agreement, there would be no right to expel a partner who, for example, sets up in competition with the business of the partnership.
- 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 – in the context of a farming family partnership, this could have disastrous consequences resulting in capital assets having to be realised.
It is vital therefore to have a written partnership agreement in place to override any unsuitable provisions of the Partnership Act 1890.
Common provisions in a written partnership agreement should include the following:
Management and Control of the Partnership
A written partnership agreement can specify the decisions which need the unanimous consent of all the partners, or decisions which need a special majority. For example, the agreement might contain a clause that neither partner can spend more than a certain amount of money, add or change products or services, relocate the business, sell to a new partner, hire or fire key staff or close the business without the written approval of all the other partners.
It is preferable to set out in the written partnership agreement if there are specific assets, such as the partnership’s premises, that are partnership property. Where the partnership uses an asset that belongs to one of the partners, it is advisable to make clear in the agreement that such asset is not partnership property and the terms on which the partnership is permitted to make use of the asset.
Sharing of Profits and Losses
If the sharing of profits is not intended to be equal, this must be set out in a written partnership agreement. The agreement should also state whether losses are to be shared in the same manner as profits.
There may also be a different division of capital profits from income profits in which case this must be specified.
Expulsion of a Partner
A written partnership agreement will usually reserve the right, with the consent of a specified majority of partners, to expel a partner in the case of bankruptcy, long-term illness, mental illness or serious breach of the partnership agreement.
Outgoing Partner’s Shares
Provisions should be included in a written partnership agreement for acquisition by the remaining partners of the outgoing partner’s share in the partnership, in the case of the death, retirement or expulsion of a partner.
The timing of payments may vary depending on the reasons for the partner’s departure but frequently payments will be by instalments. The important factor will be to enable the ongoing partnership to make the payments without unnecessary disruption to its continuing business
Termination and Winding Up
In most cases, it would disrupt business if one partner could require a general dissolution of the partnership. A written partnership agreement will include provisions covering the departure of a single partner when the business of the partnership can be carried on by the remaining partners and voting provisions specifying the required percentage majority for the partnership to be dissolved and wound up.
A partnership agreement can be altered at any time provided the parties involved agree, but once there is a dispute, that agreement can be elusive. So, partnership documents need to be reviewed periodically while relations and communications are good.
If you don’t have a partnership agreement in place, get in touch with Claire Daly on 028 8775 2990 or email email@example.com to discuss how we can help you draw up this important document; doing it now could save you time and money in the future.
If you haven’t reviewed your partnership agreement for a while, take it out and make sure it is still fit for purpose. Ideally partnership agreements, like wills, should be reviewed every 3-5 years to check whether there have be any changes to legal or tax rules that need to be considered. Additionally, the agreement should be reviewed every time a partner leaves, or a new partner joins the business.
Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.