The importance of Partnership Agreements

Many businesses (particularly those that are family run) do not have formal Partnership Agreements in place. This in the main arises from a number of misconceptions, notably:

1. that you can work through the stresses and strains of a business relationship by leaving it to honesty, good faith and trust
2. it incurs unnecessary legal costs at the outset by committing to paper what you actually do in practice

The old adage “prevention is better than cure” was never more true. Written Partnership Agreements help you curtail disagreements before they become acrimonious and litigious.

People and circumstances change and may react differently to the strains and stresses of working together. The excitement you feel at the start of a new venture may end in bitter acrimony and dispute as to who contributed what (both in terms of money and time), and who is entitled to reap the spoils of the venture. You therefore need a written document setting out at the outset the terms in respect of contributions and expectations that you all have, the monies and property that each partner contributed to the business, what you are entitled to draw throughout the term, and the percentage you own of the partnership assets.

This is in addition to how decisions will be made as the partnership proceeds and how disputes will be resolved in the face of deadlock.

You should also include a buy-out mechanism or an expulsion mechanism if the circumstances permit so that everyone knows where they stand. Succession plans need to be considered for retiring partners and also a mechanism for admitting new partners to expand the business.

In the absence of a written agreement, The Partnership Act 1890 shall apply. The Act assumes all partners are equal and does not recognise the right to expel a partner. A partnership also automatically dissolves on the death of one partner so the absence of a Partnership Agreement fundamentally affects succession planning.

It is therefore prudent to consider these issues at the outset and then commit what has been agreed to paper. If you are an existing partnership that has been trading for a number of years, it is never too late to put a Partnership Agreement in place or review an existing Agreement.

For further information please call us on (01267) 237741 or make an appointment to see one of our specialist solicitors.