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When trading through a partnership structure, you may want to consider the partnership’s position if you do not have a partnership agreement in place. This article will explain how the law treats partnerships without partnership agreements and evaluate 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 intent to make a profit. This differs from other business entities like companies and limited liability partnerships. These kinds of structures are incorporated and therefore require the owners to take specific steps to create the entity.
In a general partnership, partners will agree to 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. Similarly, you might have a partnership agreement in place, but it has gaps or does not address a specific matter, such as how the partners will share in the 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 absent of any bespoke articles, the Partnership Act will govern partnerships without a partnership agreement. However, the default provisions within the Partnership Act are outdated and do not make much commercial sense today.
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Default 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 how much capital each partner has contributed.
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’s management. However, there is no obligation on any partner to devote any of their 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.
The exception is where the proposal would change 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 all the partners to approve. An exception is if a specific provision in the agreement sets out a separate procedure for amending the partnership agreement.
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 called a “partnership at will” and rarely suits the needs of 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.
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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 then proceed to start their business.
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