16 March 2018

What will a formal partnership agreement do for me?

Are you in a partnership or thinking of forming a partnership? Have you entered into a partnership agreement or are you questioning whether it is really worth it?

If you and one or more individuals are likely to be in a partnership or considering entering into one, we would always recommend that you have a formal partnership agreement in place to protect you and your partnership’s position.

The Partnership Act 1890 (the Act) forms the basis of today’s partnership law and without a formal agreement, will govern your partnership dealings. Whilst the Act deals with many of the issues in setting up a partnership and various situations which might arise throughout the partnership, it cannot deal with everything.

Furthermore, the business market has changed significantly over the past 125 years and as a result, many of the provisions are undesirable and unsuitable for your modern business. We have outlined just some of the changes that you will almost certainly want in place to best protect your business interests.

Capital, profits and losses

  • In the absence of any formal agreement to the contrary, the Act provides that the partners shall share the capital, profits and losses of the partnership equally, irrespective of the amount of time or investment each individual partner has put into the business.
  • To avoid individual partners receiving unmerited capital and profits or suffering unfair losses, a formal agreement should set out how the partners will share the capital, profits and losses of the partnership and confirm the way in which drawings will be dealt with. These provisions should deter any future disputes.

Dissolution

  • The default position under the Act is that any one partner has the right to give notice that he wishes to dissolve the partnership, without a minimum period of notice. If a dissolution date is not provided then the dissolution is deemed to be from the moment notice is given.
  • You will want to include in your partnership agreement at the very least a clause that introduces a minimum notice period for dissolution. However in the interests of continuing your partnership and protecting your brand’s goodwill and reputation you will most likely want to include provision that makes complete dissolution impossible without a significant majority and provide a method for outgoing partners to give or receive notice and be bought out.

Other forms of dissolution 

The Act further provides that unless the partners have agreed otherwise, the exit, death or bankruptcy of any partner shall automatically dissolve the partnership.

It is therefore key that you put into place provisions which will prevent your partnership being dissolved on a days’ notice or on the unexpected death of one of your partners.

Partnerships can be a highly effective and cost efficient method of conducting business.  However, like any type of business there are risks. Through an intelligently drafted partnership agreement and careful liability management these risks can be kept to a minimum. As crucial as it is to have a secure partnership agreement from the outset, it is also very important that you continue to update your partnership agreement over time to prevent any disputes that might arise and keep the future of your partnership secure

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About the Author
Tricia MacKenzie, Senior Associate Solicitor
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