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If you are considering starting a partnership with someone, a partnership agreement is essential to ensure it starts on the right foot. A well-drafted agreement minimises the chances of a future dispute arising over important points, like how partners should divide profits. While each partnership will have its own needs that the partners will want to tailor, this article will explain some of the key concerns most partnership agreements should attempt to address.
Partnership Agreement
A partnership agreement is a legally binding contract between each of the partners. If one partner breaches a term of the agreement, which causes one or more of the partners some form of loss, the aggrieved partners can sue the offending partner.
Provided you and the other partners could demonstrate some form of loss, you could ultimately sue the breaching partner in court and recover damages (though whether or not that is the right thing to do is another matter).
Partnership Act 1890
If your partnership does not have a partnership agreement in place or is silent on certain terms, such as the procedure for expelling a partner, the Partnership Act 1890 will imply certain terms as if you had agreed upon them yourselves.
Notably, this Act of Parliament was written when Queen Victoria was still alive. As you may expect, some antiquated terms would be in effect unless your partnership agreement supersedes them, such as requiring the unanimous consent of each partner to expel another partner — including the partner that may have committed an egregious act.
For this reason alone, it is sensible to ensure you have a tailored partnership agreement.
Limits of a Partnership Agreement
However, you should be aware that there are limits to what you can exclude in a partnership agreement. Most importantly, the Partnership Act states that each partner is an “agent” for the partnership and the other partners.
The law of agency operates on the basis that if someone is an agent for another person (called the principal), the principal is generally limited in denying that their agent had the authority to act as he did.
Let us go back to the above example of the partner who purchased machinery without the consent of the other partners. Provided that the salesman assumed the partner was indeed a lawful partner and had no reason to think the buyer did not have authority to purchase the machinery, the partnership has no power to unwind the purchase.
Ultimately, the law does not expect third parties to the partnership agreement, including the machine salesman, to interrogate a private agreement between the partners each time they enter into a transaction.
Important Terms in a Partnership Agreement
We will now examine important matters most partnership agreements will address by posing a series of questions designed to have you consider the outcome of each.
Partnership Name
What will your partnership name be? Will the partnership name be different from the name you trade under?
Duration of the Partnership?
How long do you and your partners intend for this venture to last? Indefinitely? Until a certain period of time, such as after a year has passed? Or on the passing of some conditional event, such as the completion of a project or investment.
Bringing the Partnership to an End
Even if the partnership is to last indefinitely, in which scenarios should the partnership come to an end? Should it be if one partner dies? Should it be if any of the founding partners dies?
Expelling Partners
In what scenarios should the partnership expel another partner? In death? Bankruptcy? Will these events necessarily bring the partnership to an end?
Partners Retiring
Retirement in the context of a partnership means voluntarily leaving the partnership, either through old age or otherwise. What restrictions should there be on any partner leaving the partnership? In particular, should they have to sign a non-compete? Will any one partner’s resignation mean the entire partnership ends?
The Partners’ Investments
How much will each partner invest in the partnership? You should record this as a matter of fact in the partnership agreement.
Sharing in the Profits and Losses
What percentage of the profits and losses is each partner entitled to? Should it be equal or based on something else, such as capital initially contributed or hours worked?
Salary
How much should each partner be entitled to take as a salary? Will this come from a common pool, or will each partner have to account for their share at the end of a fixed period? Likewise, is this fixed period monthly, quarterly or annually?
Striking a balance between drawing a salary and sharing in the profits is one of the biggest causes of partnership disputes. Therefore, you should give a lot of consideration to these matters.
Interest in Advanced Capital
If one partner advances the partnership money by way of a loan, is the partner entitled to charge the partnership interest? What is the rate of interest? When is the partner entitled to reclaim the principle and interest?
Hours Worked
Will each partner be expected to devote their full time and attention to the business? Or will there be contracted hours? Likewise, will some partners be expected to work more than others?
Decision-Making and Delegation
Which decisions require the consent of all the partners? Which ones require the consent merely of 75% or 50%? Are there some decisions any partner is entitled to take on behalf of the partnership?
When it comes to voting on matters, should some partners have more voting power than others?
Paying for Another Partner’s Share
If a partner dies or becomes bankrupt and they cease to become a partner, what happens to their share in the partnership? Is their estate or bankruptcy trustee entitled to be bought out by the partnership?
Settling Future Disputes
Should partners settle disputes in a court of law? Or should certain disputes be heard by an arbitration venue? If so, which one?
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Key Takeaways
By going into a business partnership with another person, the law will impose certain assumptions about your intentions unless you explicitly state otherwise. You should therefore seek the advice of a solicitor to ensure that your partnership agreement adequately expresses all partners’ intentions. This will help prevent any future disputes.
If you need help navigating a partnership dispute, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers 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 as if you had come to the express agreement.
You owe your business partners a general duty to act with the utmost good faith. You also owe them the various responsibilities set out in the partnership agreement. The law also implies responsibilities if there is no partnership agreement or it is silent about a particular matter, such as how partners are to share in the profits.
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