A partnership is formed where two or more individuals decide to work together in business, so that the profits and losses of that business are shared among the partners. A partnership can have any number of partners, but there must be at least two people working together.
It is now possible to incorporate a partnership into a limited liability partnership (LLP). This way a LLP operates a little bit like a limited liability company and the partners can have, in certain circumstances, limited liability for the partnerships debts.
The law governing the operation of partnerships is still set out in a very old piece of legislation called The Partnership Act 1890. This law applies unless the partners have themselves decided upon their own set of rules in a partnership agreement. The legislation sets out how partnerships are created, run and brought to an end, as well as how profits and losses are shared between the partners.
Because this law is very old and has not been updated to move with the times, many people in partnerships find that its provisions do not suit their own views about how they want their partnership to run. They therefore prefer to set out their own rules in a partnership agreement.
Jordans’ commercial solicitors are experts in partnership agreement law. Our partnership agreement solicitors can help you draw up a bespoke partnership agreement that will suit your requirements.
Reasons for a partnership agreement
No two partnerships are likely to be the same as they are created by the set of individuals involved themselves. For example, The Partnership Act 1890 says that all partners must share equally the profits of the partnership. While this may suit many partnerships, it might not be appropriate for every type.
If, for example, one or more of the partners has put in more capital to establish the partnership than the others, or is perhaps doing more work where there are full and part time partners working in the business, it may not be the best way.
Sometimes there can be silent partners, where somebody has simply put up the money to start the business but isn’t going to actually be doing any work. In such circumstances, it may be unfair if both partners equally share in the profits.
It is better to have a written partnership agreement setting out the terms that you would like to apply to your partnership instead. This will then override the default position set out in The Partnership Act 1890 and be better suited to your business.
Partnership disputes can be a common occurrence, especially if the business’ trading position is going through some difficulties, for example during a tough trading climate. This can magnify existing issues, due to the pressure all the partners feel when the business isn’t performing as well as everybody would like.
Common difficulties individuals find with their fellow partners are circumstances when they feel one party isn’t pulling their weight or contributing enough to the successful running of the partnership, which can lead to resentment. There could be concerns over misconduct or that one partner is taking too much out of the partnership, which hasn’t been agreed between the other partners. Or they could be making decisions unilaterally without the other partners’ consent.
It is imperative that all business disputes are resolved as quickly as possible to avoid the added expense, stress, loss of management time and possible reputational damage to the business that ongoing disputes can cause. Having a well drafted and thought out partnership agreement that considers all the different things that might go wrong in the future and sets out how certain situations might be addresses is a good way to avoid difficult situations further down the line.
Setting up a partnership agreement
A partnership agreement should be tailored to your particular requirements. Jordans’ expert partnership agreement lawyers are specialists in drafting bespoke documents for you and your business. The partnership agreement should set out the following important terms:
- How all partners are to contribute to the capital needs of the partnership, who is to draw what from the profits and how any losses are to be shared.
- What everybody’s role within that partnership is and, for example, how many hours per day or week a partner is expected to undertake as part of their contribution to the partnership’s success.
- Holiday leave, sick leave, maternity and other things that you would expect in an employment contract.
- Terms surrounding who can take what money out of the business.
- How it will allow the partnership to continue in the event of one partner wanting to leave or one partner dying. This is rather than the default position in The Partnership Act 1890, which says the partnership will dissolve in the event of a partner’s death. A partnership agreement can therefore deal with the long-term future of the partnership and allow partners to come and go as may be appropriate over time.
- Explain what decisions individual partners can make on their own and what needs to be made by a joint agreement. It can legislate for things such as whether decisions have to be made unanimously or by majority.
Partnership agreement solicitors
If you are in a partnership and do not have a partnership agreement in place, we would advise you consider having one drawn up by our expert partnership agreement solicitors. Or, if you have been in partnership for some time and already have a partnership agreement, it may be worth reviewing the document to make sure it is good enough to cover the partnership as it operates today.
All partnership agreements should be reviewed over time, as partnerships grow, expand and move into different trading areas. It can be a useful exercise to keep it under review and updated so it remains appropriate.
At Jordans, our expert commercial solicitors can help you with your partnership agreement needs. Request a call back for more information by filling in the online form below, call us on 033 03001103 or contact us at each of our Yorkshire solicitors’ offices.