Partnership Agreements, Do We Need One?
A partnership can be an effective way of running a small to medium sized business. A business partnership without a formal partnership agreement is governed by the Partnership Act 1890 which, due to its age, does not always cater well for modern business practices. Putting a partnership agreement in place allows the partners more control over ownership, liability and finances.
Partnership agreements help to protect the partners and to establish rules that govern the relationship between them
The legal characteristics of a partnership and a company are very different. A company is a separate legal entity and its existence is governed by a plethora of company legislation. A partnership is not a separate legal entity.
Most significant differences are that the partners have unlimited liability for the debts of the firm. As a starting point, with no formal agreement in place, each partner is liable to the last penny of his/her fortune.
Under Order 81 of the Rules of the Supreme Court, the partners may sue or be sued in the firm’s name and most partnerships are partnerships at will which means they will last until dissolved. It can be formed without formality.
Whilst partnerships are governed by the Partnership Act 1890 and caselaw, a large number of the provisions of the 1890 Act can be overridden by agreement of the partners and most importantly by having a Partnership Agreement in place. Section 24 of the 1980 Act sets out some of the following provisions that may not reflect the partnership intentions:-
Partners share equally in the capital and profits of the business and contribute equally to losses.
The Firm must indemnify each partner for personal liabilities incurred in conducting the business.
Each partner may take part in the management of the business.
Ordinary matters may be decided by a simple majority.
No change may be made to the nature of the business without the consent of all existing partners.
No partner may introduce a partner without the consent of all existing partners.
No partner entitled to renumeration in the business.
The 1890 Agreement is also silent on important matters such as salary/renumeration/drawings and retirement, which can cause many issues in the running of a business.
It is always best when starting a business to take independent legal advice, as well as accountancy advice, on the intentions of any business owners and partners and in order to decide on the best business vehicle and structure and thereafter formalise the intentions of all involved in the form of legal Agreements.