What is a partnership agreement?
A partnership agreement existsts to regulate how the business will operate day to day and resolve any disputes between partners.
An agreement can be used as a rulebook to guide decisions in a fair and reasonable way when the Partnership faces challenging circumstances or difficult decisions. This will often prevent friction and possible breakdown of the relationship.
An agreement should address how to deal with possible challenges that may affect your business in the future and can highlight areas where your expectations are not aligned with those of your partners.
Do we have to have a partnership agreement?
No, you don’t have to have one, but we strongly recommend that you do.
A partnership will be a “partnership at will” unless contrary intention can be proved. For this, there must be an express or implied agreement.
A partnership at will is a partnership where there is no fixed term agreed for the duration of the business. Without any formal agreement the partnership is subject to the terms of the Partnership Act 1890 by default in the eyes of the law. The 1890 Act is often unsuited to modern businesses as they are automatically dissolved when a partner dies, and it is impossible for a partner to retire without the same outcome. Unless there is agreement to the contrary, a partnership at will also calls for equal division of all of the business’ profits and losses in income and capital. This means that all partners are liable for any debts incurred by the business which could result in repaying creditors out of personal assets.
It can take very little for a partnership at will to be dissolved, for example, any partner has a right to serve a notice to dissolve the partnership at any time.
What should we include in a partnership agreement?
Key features include
- Details of the capital contribution of each partner and their percentage of ownership
- How profits and losses are distributed
- The rights and responsibilities of each partner
- How disputes will be resolved
- If and how a new person could join the partnership
- How exits of the partnership are dealt with including voluntary and involuntary departures
- Premesis owndership, management, sale
- Pension “24 hour” retirement
- Rules for dissolution
- Bookkeeping and Accounts
- Provision of Tax Liabilities
- Bank Accounts
- Leave and Locum Expenses
- Partner Duties
- Partner Restrictions
- Compulsory Retirement and Retirement Due to Age and Death