Do I need a written Partnership Agreement?
Many business partners work in complete harmony with one another and without the need for a written partnership agreement. In fact, there is a common conception that a PA is a tool to ensure that all of the partners behave and stay in line.
Whilst this may be partly true, it is the detailed terms of a partnership agreement (PA) and its ability to cover all eventualities which make it worthwhile asking a solicitor to draft a suitable agreement, even if a business appears to have managed very well without one previously.
An attractive quality of a written PA is that it allows the parties to agree to terms such as drawings to be paid to the partners, voting rights, casting votes, salaries and also what is to occur should a partner pass away or become ill.
Perhaps the most important reason for committing a PA to writing however, relates to something that the vast majority of business partners may be completely unaware of – The Partnership Act 1890.
In the absence of a written agreement, the Partnership Act 1890 will be the governing document for any partnership, much like the articles of association for a company. The Partnership Act is particularly strict in its conditions, namely;
- 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 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 they wish to leave the partnership.
These hold worrying connotations for your business in that one partner can cause the immediate dissolution of a partnership. Dissolution involves the sale of all 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 business which has been running for ten years and the business is dissolved on week later – under the Partnership Act 1890, that new partner would be entitled to an equal share of the profits.
A simple agreement in writing is all that is required to alleviate these potentially disastrous consequences with the further advantage that it can be personalised to suit your business.
Sam Read is a paralegal in the property department at Barker Gotelee Solicitors.