In Short
- Without a written partnership agreement, your business will automatically be governed by the outdated Partnership Act 1890.
- Default rules can lead to impractical outcomes – equal profit sharing regardless of capital invested, automatic dissolution on death or bankruptcy, and no control over partner authority.
- A tailored partnership agreement lets you define roles, profit shares, and exit terms that suit your business.
Tips for Businesses
Trading without a partnership agreement exposes your business to unnecessary risks and outdated legal defaults. Work with a solicitor to draft an agreement that sets out clear terms on profit sharing, decision-making, partner authority, and exit procedures to prevent disputes and protect all partners’ interests.
When trading through a partnership structure, consider the partnership’s position if you do not have a partnership agreement in place. This article explains how the law treats partnerships without partnership agreements and evaluates the practical considerations that may arise.
General Partnerships
General partnerships are unincorporated business entities. The law automatically recognises a partnership where two or more people engage in a commercial activity with a common view and intent to make a profit. This differs from other business entities, such as companies and limited liability partnerships. These kinds of structures are incorporated and therefore require the owners to take specific steps to create the entity.
Despite potential risks, partnerships remain popular because they offer significant practical advantages over companies: no filing requirements with Companies House and no obligation to publish accounts publicly. However, this flexibility comes with exposure to personal liability that many partners do not fully consider until problems arise.
In a general partnership, partners will agree on the terms of how the business will operate, and these terms will govern the business relationship. Likewise, the agreement will be treated as a contract between the partners.
In practice, most partners expressly agree to specific terms that will govern the partnership and record them in a partnership agreement. However, without a partnership agreement, the law will imply a default set of terms to govern your partnership. Unlike limited companies, which benefit from the Model Articles of Association, partnerships rely on 130-year-old legislation that was not designed for contemporary commercial arrangements. Similarly, you may have a partnership agreement in place, but it may have gaps or fail to address a specific matter, such as how the partners will share profits and losses. In these circumstances, the law will imply the default provision.
The Partnership Act
Default provisions exist in the Partnership Act 1890.
Similar to how the Model Articles of Association govern companies in the absence of bespoke articles, the Partnership Act governs partnerships without a partnership agreement. However, the default provisions within the Partnership Act are outdated and lack commercial sense today.
Continue reading this article below the formDefault Provisions
The following section outlines the default terms contained in the Partnership Act. Consider if these fit your business’ needs. If they do not, your partnership agreement should specify its own set of terms.
Shares in Partnership Profit and Losses
All partners share profits and losses equally, regardless of the amount of capital each partner has contributed. For example, if Emma invests £50,000 to establish a marketing agency while her partner, David, contributes £10,000, both working full-time, they would still share an £80,000 annual profit equally, £40,000 each, despite Emma’s five times larger investment.
Shares of Ownership in Partnership Property
Each partner has an equal beneficial share in all partnership property, regardless of which partner(s) own the legal title to the property. If the partnership asset is sold, all partners will be entitled to an equal portion of the proceeds.
Work Input and Holiday Entitlement
All partners are entitled to participate in the business’ management. However, there is no obligation on any partner to devote time to the partnership. Therefore, where this default provision is in effect, the law cannot compel a partner to dedicate their time or attention to the needs of the partnership.
Likewise, the law does not specify any entitlement to holidays or maternity leave.
Roles in the Partnership
There are no roles specific to any of the partners, such as a managing or executive partner.
Similarly, all partners will have equal power to bind the partnership in any agreement. Therefore, if you wish to limit the authority of one or more partners to enter into certain contracts, you must include a term in the partnership agreement.
Decision-Making in the Partnership
All decisions are made by a simple majority, with each partner having one vote. However, this “one partner, one vote” rule can paralyse business operations, particularly in two-partner arrangements. If one partner wants to hire additional staff while the other prefers maintaining current levels, neither can override the other, potentially preventing responses to growth opportunities.
The exception applies when the proposal would alter the nature of the business or admit a new partner into the partnership. In this case, all partners must agree to the proposal.
Likewise, any change to the terms of the partnership agreement requires the approval of all partners. An exception is when a specific provision in the agreement outlines a separate procedure for amending the partnership agreement.
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Ending the Partnership
Any partner can give notice to the others that they wish to end the partnership, upon which the partnership ceases to exist. Following this, each partner is entitled to the return of their share in the partnership.
This is known as a “partnership at will” and is rarely suitable for modern partnerships. Therefore, you will need to create an express term specifying the terms under which partners can end the partnership.
Death and Bankruptcy
The death of any partner will automatically dissolve the partnership. Likewise, if any partner declares bankruptcy, the partnership ceases to exist.
Resignation and Retirement
A partner cannot leave the partnership without dissolving it. Therefore, if you wish to allow a partner to resign or retire, you must include a specific provision in the partnership agreement.
Expelling a Partner
Suppose your partnership has six partners, including Tibalt. You catch Tibalt stealing money from the partnership. After disclosing this to the other partners, the five of you agree to expel him from the partnership.
The default rule is that all six partners, including Tibalt, must agree to the expulsion. You can imagine that this default position rarely aligns with the intent of partnerships today.
Further Practical Considerations
It is essential to appreciate that the default provisions apply to your partnership automatically. You are, of course, free to create a partnership agreement specifying your terms, in which case the terms in the express agreement trump the default provisions.
However, in the event of a dispute, you cannot retroactively amend the default terms that the law implies absent any partnership agreement. Therefore, you and your partners should dedicate as much time as necessary to creating a fully-fledged partnership agreement.
Key Takeaways
If your partnership does not have a partnership agreement, the law will imply default provisions from the Partnership Act 1890. Similarly, if you do have a partnership agreement, but it is silent on a particular matter, the law will imply its own terms. Unfortunately, these default terms are outdated and not commercially sensible for many partnerships. Therefore, you and your partners should draft a partnership agreement that specifies the exact terms governing the partnership.
If you need help exploring the best-suited structure for your business, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A partnership agreement is a contract that governs the relationship between you and your partners. If a partner breaches a term, they can be held liable. If you do not have an express partnership agreement, the law will imply specific terms into your relationship from the Partnership Act 1890.
A general partnership arises when two or more people agree to act as partners and subsequently establish their business.
The moment you begin trading, the Partnership Act 1890 automatically governs your arrangement.
Yes, partnerships can be incorporated as limited companies, but this involves transferring all assets and liabilities to the new corporate entity.
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