The importance of partnership agreements
If you are running a business with another person or persons with a view to making a profit then you are in a partnership.
Like many others, you may not have a formally documented Partnership Agreement to regulate how the partners interact, and your rights and obligations within the partnership. People who have a family run business often will not have a Partnership Agreement relying on their familial relationship. It is vital for all partnerships to have a Partnership Agreement in order to try and pre-empt any problems that otherwise be very costly to resolve. If you do not have an agreement you are governed by a statute from 1890! This is often not at all helpful to modern businesses.
Benefits of having a Partnership Agreement
- Provides certainty in many issues that may arise such as how decisions are made to how profit is shared out between partners.
- Prevents costly issues occurring should things go wrong as you have a written document evidencing what is agreed by partners.
- Reduces the potential for misunderstandings in future by the Partnership Agreement covering any unwritten rules or agreements in respect of the business.
- Partnership Agreements override the default provisions of the Partnership Act 1890.
What is the default Partnership Act 1890?
If you do not have a formally written Partnership Agreement then your business will be governed by the provisions of the Partnership Act 1890. In most cases the provisions will not be what you or your business partner would want and may not be desirable for the business.
Examples of the provisions in the Partnership Act 1890
- The partnership will automatically dissolve if any partner dies.
- Any partner can bring the partnership to an end by giving notice.
- All partners will have an equal say in the business meaning any issues could lead to lengthy unresolved disputes.
- All partners can take management of the business.
- All partners will be entitled to equal shares of capital and profit.
- All partners will have to equally contribute to any loses and be liable to any debt or obligations even if they have left the partnership.
- It is not possible to remove a partner from the partnership, the only option is to end the partnership.
These are just some of the provisions in the Partnership Act 1890 and often these are not suitable for your business or partnership. If this is the case it is vital for you to make a formally written Partnership Agreement to set out terms that you and your business partner are happy with.
Things to consider for your Partnership Agreement
A Partnership Agreement can be written at any point, even if you have been in business for a long time, this is not something just for new businesses or partnerships.
When creating your Partnership Agreement the most common things that are covered are:
- Amount of capital introduced by each partner.
- How profit and loss is dealt with between partners.
- Duties and powers of each partner such as who can make decisions, what is expected of each partner etc.
- Employment issues such as holidays, maternity leave, benefits etc.
- What happens should a partner wish to leave or dies.
- What happens if a disagreement occurs and how it will be resolved.
- How often meetings will be held and who will be able to vote on decisions.
- Can someone else join the partnership and if so how will that be done.
Your Partnership Agreement can include many more things and most importantly will include what you and your partner wish to have included.
How can Pinkney Grunwells help?
At Pinkney Grunwells we are here to help you tailor your Partnership Agreement to best suit the needs of you and your business. Our specialist team are on hand to guide you through every step and explain everything in plain English to create the best agreement to make your business run smoothly.
If you wish to discuss Partnership Agreements further then contact us here.
