Why you need a partnership agreement

The start of a new venture is an exciting time, especially for a joint venture.  As you focus on getting it off the ground it’s easy to overlook some of the legalities. And no one wants to consider what might happen if times become tough or there is a falling out between the partners.

Without any partnership agreement setting out the precise terms relating to how the partners will deal with each other in the case of a dispute, problems can be extremely messy – especially in partnerships where some people provide the money and others provide the time.

The Partnership Act sets out a default position for if things go wrong, but the rules may not be suitable for your individual needs.  That’s why you need a written partnership agreement that’s been specifically worded for you and your partners right from the start.  Here are some of those default terms:

1) Equal contributions in capital, profits and losses

If one partner invested (or subsequently invests) more than the others in terms of time or money, without a partnership agreement, that partner would not get a share of the profits that reflect their larger investment if the business should collapse.

2) All partners may take part in business management

There is no such thing as a silent partner or sleeping partner. Unless there is a partnership agreement to the contrary, everyone get a vote. If you have invested, you have a say – subject to being overruled by the majority.

3) No partner is entitled to remuneration for acting in the partnership business

They are only entitled to an equal share in the profits. This may not be suitable if one partner is doing more work or introducing more business than the others and wants to be rewarded for that, or is engaged full-time working in the business while others only work part time.

4) Dissolution is always a threat

Any partner may end the partnership at any time. This can be particularly problematic if there is a dispute and one partner uses the threat of dissolution as a lever. It may not be a good time to bring the relationship to an end – for example, if the project for which the partnership was established has not ended. There is no way for a disenchanted partner to retire other than to dissolve the partnership unless it is agreed otherwise.

5) There is no power for the majority to expel a partner unless agreed between them

This can be a game changer for the business. If one partner underperforms or there is misconduct then the only way to remove them would be to dissolve the partnership. If there is an otherwise successful business this may not be what the other partners want at all and can ruin the goodwill the business has built up over time.

6) There are limited restrictions on the conduct of former partners unless agreed to in writing

If there is an agreement, more onerous restrictions can be placed on exiting partners, for example to prevent the leaver setting up in competition or poaching customers or staff of the business.

7) Partners are jointly liable for debts and obligations incurred

If there is misconduct by one partner that leads to an obligation for the business, there is no automatic right for the other partners to pass that liability on to the partner who has behaved wrongly.

Similar considerations apply to all forms of joint enterprise, whether it’s a partnership, a limited liability partnership (LLP) or a Limited Company. It is always best to consider what the aims of the business are from the start, and agree what the responsibilities of those involved should be and record them.  This can be through a partnership agreement, a members’ agreement (for an LLP) or a shareholders’ agreement (for a limited company).

If you’re setting up a new business or entering into a new partnership, we’d be happy to talk through the important issues and ensure your business is set up in the best way, legally compliant, tax efficient and with a solid strategic plan to ensure its success.  Feel free to get in touch on 020 8530 0720 or email paula.w@nordens.co.uk.

The information in this article is taken from a piece we thought was excellent, written by Nina Ferris in RealBusiness.