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As a small business owner going into partnership with others, you will naturally be focussed on your business plans and strategy, but at the top of your to-do list should be drawing up a partnership agreement.
What is a partnership agreement?
You can think of a partnership agreement as a governing document – the written constitution – for your new business. It is a fairly lengthy written agreement which should be agreed between you and your business partners and entered into at the very start of your business relationship.
Why is a partnership agreement so important?
A partnership agreement is important as it’s your primary reference point with regards to the agreed terms between the partners. It can prove a great tool in sorting out any issues that may arise before they develop further, and as such it can be very helpful in both avoiding and resolving disputes.
Further, your written partnership agreement provides the perfect vehicle to specify the precise terms that have been agreed. There are no rules for the agreement, and therefore it can be entirely bespoke for your specific set of circumstances.
What is the risk in not having a partnership agreement?
If you do not create a formal partnership agreement, then your partnership will fall back on the default legislative provisions in the Partnership Act 1890. The 1890 Act is a rudimentary piece of legislation which will imply crude terms to your partnership.
For example, the 1890 Act will imply that all the partners are to share the profits and losses equally between them, i.e. if there are three partners, that is one third share each. That may be entirely contradictory to your intentions and interests.
What terms are usually found in a Partnership Agreement?
Your agreement should cover every major legal aspect of your partnership. In particular, you will want the following terms included:-
- Partner roles – you may wish to define certain partner roles and responsibilities.
- Authorisations – you can place limits on an individual partner’s authority levels, such as on spending limits and on decision making (hiring and firing etc).
- Matters requiring unanimous consent – certain important matters you can keep as requiring all partners’ consent e.g. major structural changes and investments etc.
- Profits and Losses – here you can specify the exact details of each partner’s profit and loss share and any other terms which may apply in that regard.
- Capital accounts – the terms regarding the partners’ capital accounts should be clearly outlined.
- Retirement – it is vital that retirement provisions are agreed to ensure orderly transition when the time comes.
- Expulsion – the ability to expel an errant or badly under-performing partner is all part of the running of a successful partnership enterprise.
- Death – when a partner passes away, it is important that the agreement provides how their share in the business should be dealt with, and where payments are payable to their estate, the applicable timescales should be outlined.
- Incoming Partners – new partner onboarding procedures should be considered, including the requirement for each new partner to sign up to the Partnership Agreement terms.
- Dispute Resolution – these clauses are important to include as they provide mechanisms by which the partners can reach amicable and workable resolutions to their partnership or shareholder disputes.
In addition to the above, there will be many other terms and policies that you can put in place via the Partnership Agreement to help with the smooth administration of your partnership business. These could include terms for dissolving the partnership, how to approach any changes in your business, or other terms and conditions.
Get legal assistance from LawBite
If you would like help drafting a partnership agreement or require advice with regards to your rights and obligations under an existing agreement, we are here to help.
We can advise on all aspects of setting up in partnership. By appointing an expert lawyer to assist you, it gives you the peace of mind to know that all your partnership needs will be met.
To find out more, book a free 15-minute consultation with one of our expert lawyers or call us on 020 3808 8314.
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