Partnership Agreements

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Partnership Agreement FAQ

Why do you need a Partnership Agreement?

A Partnership Agreement is an important document. Although many partnerships are created informally, without a written agreement businesses run by a partnership risk legal, financial and operational issues.

What is a Partnership Agreement?

A Partnership Agreement is a binding contract between the partners that sets out how the partnership will operate, clarifying ownership, rights, and responsibilities.

Do you legally need a Partnership Agreement?

Not legally. A partnership is a relationship that exists when more than one person carries on a business with a view to profit. But without a written Partnership Agreement the Partnership Act 1890 applies automatically, which can produce results partners do not expect or want.

For example, under the historic act, partners cannot retire (and doing so may cause the dissolution of the partnership). Nor is there any right to expel a partner (e.g. in the case of misconduct).

What risks do you face without a Partnership Agreement?

There are three main reasons why the partners of a partnership may consider entering into a formal partnership agreement, being:

for clarity around the running of the business. This may avoid costly disputes in a variety of areas (e.g. profit split; decision making; partner authority; what happens when partners leave; what happens on the death of a partner; etc.);
certainty over whether certain assets are assets of the partnership, an asset of a specific partner (which might be lent to the partnership), or something else. This may be particularly important with regards to valuable assets such as land; buildings; farmland; and expensive plant & machinery; and
to specify what happens on the death of a partner. We have seen situations where a bank will assume that the partnership has ended in its current form and therefore will look to close bank account(s) on the death of a partner.

A contradiction between a Partnership Agreement and other documents (including the accounts of the partnership) can cause problems, for example on the death of a partner.

Can a Partnership Agreement protect the partnership’s bank account?

Yes. Banks can often freeze or close accounts on the death or retirement of a partner unless continuity of the partnership is documented. A written agreement helps avoid this disruption, avoiding the ‘default’ position under the Partnership Act 1890 whereby the partnership is automatically dissolved on the death of a partner.

What are the main points a Partnership Agreement should cover?

Anything that the partners feel is important, as these are generally bespoke documents that set out the agreed position between the partners.

Generally, we would expect this to cover areas such as: how profits will be split; decision-making and voting; partner authority; admission/retirement; expulsion (forcing a partner to retire); provisions dealing with the death of a partner; banking arrangements; competition restrictions; and dissolution procedures.

Does a Partnership Agreement help avoid disputes?

A well-drafted Partnership Agreement should reduce the impact of disputes if they arise.

Ideally a Partnership Agreement is created but referred to rarely, because the business runs smoothly. However, a well-drafted agreement prevents ambiguity, sets expectations and provides agreed methods for resolving disagreements should these arise.

As partners can be jointly and severally liable for the actions of the other partners, it is important to understand what decisions can be made by individual partners, and what decisions must be discussed and agreed by a majority/all partners.

How often should a Partnership Agreement be reviewed?

Ideally a Partnership Agreement should be reviewed periodically and certainly when major changes occur such as new partners being admitted to the partnership; the retirement of existing partners; or any changes in profit sharing or voting structure; etc.

How can you get a Partnership Agreement drafted?

We can draft a tailored agreement, review existing documents and/or advise on suitable structures for your business.

If you would like a Partnership Agreement drawing up, or to discuss your partnership, please contact our Corporate and Commercial team on 01482 630320 or at enquiries@bmcf.co.uk.