Like companies, partnerships are a common business model but for those looking to form a partnership one may be forgiven for asking whether it is worthwhile drawing up a partnership agreement. After all, does the ‘Partnership Act 1890’ (“the Act”) not offer the protections business owners need?

It is this writer’s view that it does not.

What is a Partnership?

Under English law there is no need for the terms of a partnership to be in writing for the law to recognise that a partnership exists. To determine whether there is a partnership will be a matter of fact and the essence of any partnership will be the nature of the relationship between the two parties.

Generally speaking, a traditional partnership will have formed when two or more people conduct business with a view to making a profit.

There are other forms of partnerships with their own distinct legal personalities known as an LLP but these are not the subject of this article.

What is a Partnership Agreement?

A partnership agreement is essentially a contract between the partners that sets out how the business is managed and the relationship between the partners. Typically it will cover issues like how profits are distributed, how disputes are resolved and how decisions are made.

There is no prescribed content for a partnership agreement and it is very much a decision for the partners how much (or how little) they want to include.

Why should I consider a Partnership Agreement?

It may not seem necessary to have a partnership agreement where relations between the partners are good but misunderstandings and disputes can (and do) invariably arise and by not having an agreement in place partners may find themselves exposed to the default provisions of the Act.

This old legislation is not, unsurprisingly, well suited to modern businesses and here are just a few brief reasons why:-

1. Removal of Partners: If the partners wish to remove another partner there is no provision to do so under the Act. Under the Act no majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. This leaves those without an agreement with just two options. Either the partners need to reach an agreement on the terms of the exit or apply to the Court to dissolve the partnership.

2. Liability of Partners: A traditional partnership is not a legal entity in its own right and, therefore, under the Act, every partner is jointly responsible for the contractual debts and obligations of the partnership incurred while they are a partner. If the liability arises solely from the conduct of one partner the Act does not automatically allow partners to pass on the liability to the wrongdoer.

3. Capital and Profits: A partnership agreement will usually deal with the division of capital and profits of the business. In the absence of such an agreement under the Act all partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses sustained. This applies regardless of whether one partner has contributed more.

4. Death of a Partner: Death may not be something that partners naturally think about when setting up a business but it is something that should be considered. Under the Act if a partner dies then the partnership is dissolved as regards all the partners.

5. Post Termination: Subject to fiduciary duties, the Act does not expressly impose restrictions on partners once they leave the partnership. Having a partnership agreement will allow partners to put in place more stringent limits on partner’s conduct on leaving the partnership.

Having a detailed, bespoke, partnership agreement can avoid many of the issues raised above and, if a dispute arises, can save significant time and costs for all involved.

If you are looking to set up a business and require assistance preparing a partnership agreement or if a dispute has arisen and you require specialist advice Colman Coyle are well placed to assist you.

If you would like to discuss any of the issues raised here, please contact Adam Palmer at adam.palmer@colmancoyle.com