What is a Partnership?
Section 1(1) of the Partnership Act 1890 defines a partnership as the ‘relationship which subsists between persons carrying on a business in common with a view to profit’.
A valid Partnership does not need to be registered anywhere and the intentions of the parties are generally irrelevant. All that is required is that:
- two or more persons
- carry on business
- with a view to making a profit
A Partnership can be composed of natural persons, bodies corporate or a combination of both.
Different to an incorporated body, a Partnership does not have a separate legal entity to that of the Partners. Therefore, Partners have unlimited liability.
The Partnership Act 1890, which is an outdated piece of legislation will govern the Partnership should no written Partnership Agreement be put in place.
What is a Written Partnership Agreement and Why do you Need it?
A Partnership Agreement is a legally binding document which allows the Partners to structure their relationship in a way which suits their business best.
Going into business with a Partner, but without a written Partnership Agreement is ill-advised. A written Partnership Agreement not only allows you to make the most of your combined skills and capital, but clarifies the parameters of your business relationship.
Generally, partnership agreements cover details such as:
- Names of the Partners and of the Partnership
- Commencement date and duration of the Partnership
- Obligations, Roles and Responsibilities of the members of the Partnership
- Meetings and Decision Making Details (eg. whether unanimity or majority vote is required)
- Ownership of Partnership Property
- Capital Contribution of the Partners
- Financial Details such as Profit Share, Expenses, Drawings and Tax Liability
- Indemnity and Insurance
- Leave Entitlements
- Procedures on Retirement / Resignation / Death
- Procedures regarding Dissolution, Termination and Expulsion
- Procedures for Admission of New Partners
- Dispute Resolution
Each Partnership Agreement will be unique to the requirements of the Partners and should be discussed and negotiated with legal advisors to ensure the Partners have clarity and certainty in their business relationship rather than having confusion and conflict where there is no such written agreement.
Avoiding the Partnership Act 1890
Crucially, if a Partnership Agreement is not put in place, the Partnership Act 1890 will govern the Partnership, which is largely inappropriate for modern businesses.
Without a Partnership Agreement, the Partnership Act 1890 provides that:
- Any Partner may dissolve the Partnership without consent of the other Partner
- There is no right to expel a Partner
- Where a Partner dies, the firm will automatically dissolve
- There is no power to retire, although a Partner can retire by dissolving the Partnership
- All Partners are entitled to share equally in the profits and capital of the Partnership and must contribute equally to the losses, regardless of contribution of capital
- Partners are liable for any debts created by the fault of the other Partners
- Partners are liable for the misapplication of monies by any one of the other Partners
- No Partner is entitled to remuneration for acting in the Partnership
- There is nothing in the Act to prevent a Partner competing with the Partnership if they leave the Partnership (Most modern Partnership Agreements will therefore contain a non-compete clause)
- All Partners can take part in management of the business
- Only a simple majority of Partners votes is required to make decisions
Therefore, if these terms are to be avoided, it is necessary for a Partnership Agreement to be put in place in order to override the Partnership Act 1890. Any details that are not provided for by the Partnership Agreement, will be implied by the relevant terms of the Partnership Act 1890.
Seeking legal advice to put a written Partnership Agreement in place is crucial in order to facilitate your business running smoothly, and to form an agreement that suits your specific Partnership arrangement.
How can We Help?
BHSM has acted for a number of doctors and veterinary practices drafting Partnership Agreements to suit the specific business relationship of each individual case at hand and as a result have considerable experience in this field. This experience means we can advise on exactly what steps to take when preparing to enter into a new Partnership, or merely looking to draw up a written Partnership Agreement for an existing Partnership. Our expertise can help to negate the ordinary stress and uncertainties involved in entering new business arrangements.
This article is for general information purposes. Legal advice must be obtained for individual circumstances. Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.
The Importance of Written Partnership Agreements
What is a Partnership? Section 1(1) of the Partnership Act 1890 defines a partnership as the ‘relationship which...
10 Sep 2021