Do I need a Partnership Agreement when setting up a business?

Amelia Vaughan in the corporate team at Wake Smith Solicitors looks at Partnership Agreements and their uses and benefits.

This article covers:

• What is a Partnership?
• Are they always formal?
• What happens if you don’t have one?
• Why have a Partnership Agreement?
• Providing certainty for Partners
• Your next move?

What is a Partnership?

This is when two or more “persons carrying on a business in common with a view of profit” according to the Partnership Act, 1890.

Are they always formal?

Unlike other corporate structures, there are no formal registration requirements to form a Partnership. in fact, a Partnership exists as soon as the above definition is satisfied.

What happens if you don’t have one?

Although establishing a Partnership may be seen as an easy and low maintenance option to start a business, if no governing documents are drawn up, such as a Partnership Agreement, business owners run the risk of falling foul to the default provisions of the Act.

If, as a Partnership, there has been no Partnership Agreement drawn up, the default provisions may come as a surprise, including to some of the actual Partners!

Examples of some default provisions of the Act include:

• Partners must share equally in capital and profits (regardless of their initial capital contributions);
• Partners must contribute equally to losses;
• Admitting a new Partner requires unanimous consent of all the partners;
• A Partner has no right to retire (in fact, giving notice to retire in some instances will have the effect of dissolving the Partnership);
• There is no power to expel a Partner; and
• Death of any Partner will lead to the Partnership automatically dissolving.

Why have a Partnership Agreement?

Drafting a Partnership Agreement governs the relationship between the Partners.

Partnership Agreements afford protection to all types of Partnerships: whether they are family run, well established Partnerships or a new Partnership just starting out.

Drawing up a Partnership Agreement provides certainty for the Partners for how the business operates.

It provides options for the Partnership to decide how to resolve any disputes, to prepare for the unexpected and most importantly, provide options where the Act does not.

Providing certainty for Partners

Examples of how a Partnership Agreement can provide certainty for Partners include:

• Deciding how the Partners will share in capital and profits;
• To prevent a Partnership automatically dissolving on the death of a Partner;
• To allow Partners to establish their own process of admitting new Partners;
• Deciding how to resolve disputes;
• Setting up procedures for when a Partner wishes to retire, for example:
• Preventing more than one Partner serving and working their notice to leave the Partnership at any one time;
• To place restrictions on exiting Partners (for example, to prevent the exiting Partner immediately on exit starting a new Partnership, carrying on a similar business and using the same or similar name); and
• Establishing how continuing Partner(s) will pay any entitlement due to an exiting Partner.
• Many more beneficial clauses.

Your next move?

If you would like a Partnership Agreement drawing up or to discuss your Partnership, please contact our Company Commercial team on 0114 266 6660.

Find out more about Corporate. company and commercial law services

Published 08/08/22