Partnership agreements

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Partnership Agreement Solicitors

Business partnerships come in many forms – ranging from a simple situation where 2 people decide top set up in business and either overlook formalities or for whatever reason decide not to trade as a limited company, or perhaps a joint venture between 2 existing businesses or professional partnerships which may be in the form of a Limited Liability Partnership.

Fundamentally, the same considerations apply as for shareholders in a limited company. There is very limited statutory regulation and many practical and legal problems that can arise, whether the business partnership succeeds or fails.

This means it is vital to have a well thought out and comprehensive business partnership agreement in place at the beginning.  We have advised on many such agreements and would be happy to discuss with you your circumstances and then costs of drafting or negotiating a suitable contract for you. 

What are the main issues to consider in a partnership contract?

Termination of partnership – under a partnership agreement, stipulate how much notice the partners are required to give and a mechanism for resolving what happens to a departing partners share of assets and liabilities and any advance drawings or loans to or from the partnership.

Death or serious illness of a partner – the consequences on the death or serious, long term illness or absence of a partner i.e can the remaining partner buy out the interest ? If so, on what basis and how will the partnership share be valued? What about liabilities?.

Control issues and who will do what on a day to day basis – not all partnerships involve equal ownership or a situation where all partners will work full time in the business. There are also key decisions which will need to be made, so a process as to how the decision will be taken is important, as is avoiding issues if there is equal ownership in terms of resolving deadlock.

Decision to sell the business – what happens if 1 partner wants to sell but the other(s) don’t want – should there be so-called drag and tag clauses forcing minority owners to go along with a sell ? If so, on what terms? What about the possibility of buying out other partners and if so, with what valuation mechanism and other process?

Drawings and/or borrowings – it is not unusual with old-style unlimited partnerships for partners to have different drawings – some partners may not draw their full entitlement and others might draw in advance or borrow from the business. It is important to have a policy on this.

Cross indemnities – also important due to joint and several liability and where a creditor may opt to go after only 1 or some of the partners and not others..

Important Partnership Agreement Clauses

  • Commencement and Duration
  • Partnership Name
  • Place(s) of business and ownership of the property therein
  • The accounts system to be used
  • Banking arrangements
  • Capital, current accounts, drawings
  • Partners obligations and duties
  • Maternity etc leave
  • Management and meetings
  • Limitation on any one partners authority
  • Retirement and expulsion

Potential risks of not having a partnership agreement

  • Any partner can bring the partnership to an end – simply by giving notice (verbal) which may arise in less than ideal circumstances for the remaining partner(s). If the partnership is dissolved the business is closed and assets will be sold and debts will have to be paid. The value of goodwill may well be lost.
  • No ability to expel a partner – the only way to get rid of a partner is to dissolve the partnership, which can have legal and tax consequences.
  • Default position is equal ownership and liability – Under the Partnership Act all profits, losses and management control are automatically shared equally.
  • Personal and joint and several liability – individual partners can be personally liable for debts, no matter how much individual work they put in. If they become unmanageable, partners may even be liable for other partners debt as well as their own.
  • Automatic dissolution – the withdrawal or death of a partner means that the partnership would automatically be dissolved.
  • Competition – no stipulation as to whether a departing partner is able to start a competing business/poach staff.

 Limited Liability Partnerships (LLP)

Created by the Limited Liability Partnership Act 2000. LLPs are essentially a half way house between a partnership and a company, and the LLP is a separate legal entity from the partners, although the partners are taxed as individuals as in a partnership. As with partnerships, LLPs should have partners agreements to control the relationships between the members.

One of the potential disadvantages of creating an LLP is that it needs to be formally incorporated at Companies House and accounts filed and the LLP’s financial position is therefore available publicly.
Converting from a general partnership to an LLP

The key areas to consider when converting from an existing general partnership to an LLP are:

  • Will all partners in the partners transfer to the LLP?
  • Will there be different classes of members (full, salaried, fixed share)?
  • What will be the capital put into the LLP?
  • Will all partnership property assets transfer to the LLP and how are current liabilities to be dealt with?
  • What terms need to go into the new partnership agreement?

Removing a business Partner

With both LLP’s and general partnerships which do not have a partnership agreement a partner cannot be removed, and the ultimate outcome of any dispute would have to be dissolving the partnership, which has significant implications (please see below). This is one reason (among many) why all partnerships should have a partnership agreement.

Unlike a company, a partnership does not possess a legal identity, and is therefore not a legal ‘person’. It is merely a framework which outlines the way in which the partners who share a company will work together. Unless stated otherwise in documentation, partners are equal. They therefore hold equal rights in being able to take up contracts, but also hold equal responsibilities when it comes to ensuring these contracts are fulfilled. Partners will therefore divide profits and spread losses equally.

What about Informal Business Partnerships?

If a partnership agreement has not been formed, it is likely that the type of partnership you will have concerning your company is an informal one. If you do not have a partnership agreement, your partnership is governed by the Partnership Act 1890. This does not present any problems where the value of your business remains low, as should a disagreement arise, it is quite easy for partners to just go their separate ways.

Problems can arise however where the value of the company increases and there are claims by partners to different amounts of profit. Without a partnership agreement, everything is split equally, regardless of a difference of time, resources and money put in to the company by each existing partner.

It is therefore important to consider carefully the idea of creating a partnership agreement before you decide to go into business with someone. Whether they are a relative, a close friend or a stranger, it is impossible to tell how they will act should disputes arise within the business. It is therefore good to know all of your rights are protected, and any oral agreements you have made will be upheld with this document.

Terminating a Business Partnership where there is a valid Partnership Agreement

Unless your agreement states differently, a partnership is normally dissolved when one gives notice to the remaining partners of his intention to dissolve. It can also occur automatically where a partner has died or has been ruled bankrupt. A partnership agreement may include other conditions which would warrant an automatic dissolution, so it is extremely important you check this document.

If your partnership agreement mentions dissolution, it will outline the procedure necessary to fulfill the requirements for a valid and successful dissolution. It is strongly advisable that you do not just walk away from your responsibilities as a partner if you have decided to end your partnership, even if you think it is better for the business. This is because you may still be held responsible and liable for a breach of the partnership agreement or of a duty which is imposed by the Partnership Act 1890. You also may be liable for any debts the partnership/company owes, even once the dissolution has been agreed upon.

If you have all decided you are going to dissolve your partnership, it is advisable that you value your partnership at the date of this agreement. This is valued as a continuing enterprise.

Terminating Limited Liability Partnerships

Limited partnerships are set up with the aim of limiting a partner’s personal liability for debts that could be incurred through a partnership. In this way, a limited partner is not responsible for any debts over and above their partnership capital. The company remains a general partner, and therefore retains unlimited liability. These are governed by the Limited Partnerships Act 1907.

Limited liability partnerships are governed by the Limited Partnerships Act 1990. The results of having a limited liability partnership are very similar to a limited company. Again, it prevents partners from being fully liable personally for a company’s debt.

Please do get in contact if you need solicitors for advice on or drafting a business partnership agreement.