Do I need a written partnership agreement?

Many business partners work in complete harmony with one another without the need for a written partnership agreement. In fact, there is a common belief that such an agreement is imposed to ensure partners behave and stay in line.

Whilst this may be one effect, it is the process of considering all eventualities that makes it worthwhile asking a solicitor to draft a suitable agreement, even if a business appears to have managed very well without one previously.

The written partnership agreement will normally include terms such as drawings to be paid to the partners, voting rights, casting votes, notional salaries and also what is to occur should a partner pass away or become ill.

Perhaps the most important reason for having a written agreement, however, relates to something that the vast majority of business partners may be completely unaware of – the Partnership Act 1890.

In default of a written agreement, the Partnership Act 1890 will govern the relationship, much like the Companies Act 2006 for a company. The Partnership Act provides as a default position that;

  • The death or bankruptcy of any partner will automatically dissolve the partnership;
  • ALL drawings, voting and profit sharing will be equal regardless of any intentions to the contrary;
  • There is no allowance for notional salaries; and
  • All partnerships are deemed ‘partnerships at will’ and can be dissolved by any partner at any time by giving notice to the others that he wishes to leave the partnership.

These default provisions may pose worrying implications for your business if one partner can cause the immediate dissolution of a partnership. Dissolution involves the sale of all of the partnership’s assets and the need for automatic repayment of any loans and/or debts. There are only limited circumstances in which the continuing partner(s) can avoid this and continue running the partnership after the outgoing partner has left. Further, say a partner has recently joined your longstanding business – would you really want your new recruit to cause a dissolution one week later – especially if the Partnership Act rewards him or her with an equal share of the assets.

A simple agreement in writing is all that is required to alleviate these potentially disastrous consequences and it can be personalised to suit your business.

This article first appeared in the East Anglian Daily Times 28th February 2018.

Dermott Thomas is a partner and specialist litigator/advocate at Barker Gotelee, Ipswich solicitors

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