The importance of a partnership agreement

27th July 2022

If you and one or more individuals are considering entering into business partnership, or even if you are already in one but without an agreement, we would always recommend that you have a formal partnership agreement in place. This protects both the rights and obligations of the co-partners, and the operation of the partnership.

A partnership without a formal, written agreement is known as a partnership at will. Where you have a partnership at will, the Partnerships Act 1890 governs your dealings and various situations that might arise. Unfortunately, the 1890 Act has a generic framework which is unlikely to be commercially desirable or suitable for you and your partners.

Core to the business interests of the partners will be the way in which they share capital, profits and losses. In the absence of a partnership agreement, the Partnerships Act says that partners shall share all capital, profits and losses of the partnership equally, irrespective of the amount of time or investment each partner puts into the business.

A formal partnership agreement will allow the partners to set out how each party will share the capital, profit and losses and confirm how drawings will be dealt with. This can be drafted in a way which is specific to your partnership and avoid any potential future disputes.

Another example which is important to be dealt with under a partnership agreement is the way in which the partnership will be ended. The default position under the Partnership Act is that any one partner has the right to give notice that they wish to dissolve the partnership without a minimum period of notice.

If no dissolution date is provided, then it will be deemed to be very the moment notice is given. This is a very undesirable provision, and one that should be dealt with in a partnership agreement. You can ensure there is a clause which introduces a minimum notice period for dissolution and additionally, in the interests of continuing the partnership, you may also want to ensure there is a clause which makes a complete dissolution impossible without a significant majority.

Additionally, the Partnerships Act says that the partnership automatically dissolves if any partner dies, and the deceased partner’s interest accrues to the others. It will be important for the partners to consider the survival of a partnership in such an instance and have written evidence of what has been agreed between the parties.

For example, most partnership agreements provide for the partnership to continue or preserve the financial interest for the benefit of the successors of the deceased partner.

A partnership agreement allows the parties to consider aspects personal to their partnership and avoid disputes in the future. This could include:

  • The duties and powers of each partner
  • Voting rights
  • The admission of new partners
  • The retirement and expulsion of partners.

The partnership deed can also address issues such as holidays, parental leave, restrictive covenants and financial entitlements on an exit.

Partnerships are a highly effective and flexible way of conducting business. However, to maximise the benefit of the business relationship, a well-drafted and comprehensive partnership deed is imperative. Not only will you be able to tailor the agreement to your business, but you’ll also have made provision for matters that can cause disputes in the future.

A partnership agreement can be drafted at any time, no matter how long you have already been in business for. We would always recommend if you have no formal agreement in place that you strongly consider the terms of your partnership being put into writing by way of a legally binding agreement.

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