Partnership Agreement – why you’d be wise to consider one.
Businesses come in all shapes and sizes. Whether you are a family of farmers, a car garage or in the professional services industry, there is a good chance you will be operating as a “Partnership”. A “Partnership” is a relationship between two or more people carrying on a business in common with a view of profit. This type of business is distinct from a sole trader or limited company and there are default rules that apply to businesses operating as a partnership.
There is also common view, particularly among family partnerships, that the Partners of the business are close knit and shall be able to agree matters between themselves. However, people may change, people may move on and sadly people pass away. Many Partnerships overlook the need for a bespoke Partnership Agreement to regulate the terms and conditions of the business.
Without a bespoke Partnership Agreement for your partnership, your business is relying on the default rules of the Partnership Act 1890. These default rules are not always suitable for every business. For example, the Act provides that:
- The partners cannot decide to “expel” a partner for any wrongdoing;
- All partners share equally in the capital, profits and losses of the business;
- Any property brought into the partnership for the purposes of the business will be “Partnership Property”; and
- The partnership automatically dissolves upon the death of any one partner or by notice of any one partner.
These default rules can be detrimental to the business. What if the rest of the partners want to remove a partner from the business? What if a partner intends on the family home to remain their own asset but it is used in the business? What if the business is profitable and the partners want to carry on following the death of one of the partners? What if the partners want to share the profits in different proportions?
A Partnership Agreement can help answer these questions and create bespoke rules specific to the needs of your business, creating clarity from the outset and limiting the need for a lawyer later down the line.
Some of the points that a Partnership Agreement can deal with are:
- How each partner is expected to contribute to the capital of the business.
- The proportions which each partner may share the profits and losses of the business.
- How much time, effort and responsibility each partner is expected to contribute.
- Which property is, and which property is not, the property of the partnership (which can be particularly important for claiming Business Property Relief following the death of a partner).
- How meetings are held and how often.
- The rules which a partner may be removed by a majority of the partners.
- The rules if a new person wants to join the partnership.
- What happens if one of the partners retires, dies or resigns from the business.
- Whether there are any restrictions on an outgoing partner when the leave (such as not to compete with the business).
Clarity is key and therefore having a Partnership Agreement is worth the initial expense to hopefully save time, costs and effort later down the line. When questions are raised, the Partnership Act 1890 often provides an answer which is simply not suitable. Why not get ahead and put a framework in place to deal with issues now and in the future?
If you require a Partnership Agreement or have any questions about your business in general, please do not hesitate to get in touch with our Corporate Department on 01224 332300 or start a conversation with us at: https://www.raeburns.co.uk/services/commercial-law/corporate-business-law/