Partnership Agreement Solicitors

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Partnership Agreement Solicitors in London

Business partnerships come in many forms – ranging from a simple situation where 2 people decide to 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 business 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 to? Should there be so-called drag and tag clauses forcing minority owners to go along with a sale? 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 profit 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.

Potential risks of not having a partnership agreement

If you don’t have a well thought out, negotiated and well drafted agreement, the following are likely to apply :-

  • 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 – a former partner would have no restrictions on starting a competing business or poaching 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.

Please do get in contact if you need solicitors for advice on or drafting or negotiating a business partnership agreement or if you have a dispute with a business partner.