Partnership Agreements: why are they important?

Are you are a partner in a partnership? Perhaps you’re thinking about getting involved in a partnership with somebody else? Either way, it’s very important to have a partnership agreement. If you already have one, it may be sensible to consider whether it should be updated; in order to ensure that it remains fully compliant and enforceable.

This blog will only address the importance of a partnership agreement from a general partnership’s perspective; not from a limited liability partnership’s perspective (LLPs). Whilst it is open to you to have a partnership agreement with an LLP, the partners of an LLP have limited liability. They are therefore afforded greater protection than the partners in a general partnership.

Partnerships are regulated by the Partnership Act 1890 (PA) which is the basis of today’s partnership law. The issue arising therefrom is that the PA does not cover all the ground required to be covered in setting up a partnership. Furthermore, as it came into force in 1890, some of its provisions are not appropriate for modern business life. It is therefore always advisable for partners to enter into a formal partnership agreement to regulate their operations and affairs.

A partnership agreement can cover extensive provisions; most of which may be more beneficial than relying on PA or general law – the table below provides a comparison:

	Partnership Act 1890	Partnership Agreement
Duration	Fixed term with the partnership automatically dissolved at the expiration of the term; or Indefinite term – partnership terminated at any time by notice given by any partner to the others	In addition to the indefinite term, you may add other circumstances when the partnership may be brought to an end, for example- conduct, incapacity etc
Capital / Profit & losses	The capital contributed to the partnership by the partners does not determine the share of net assets or capital to which they are entitled- partners are entitled to share equally in the capital and profits of partnership and must contribute equally towards the losses.	It is open to you to make provisions in the agreement as to the share that each partner is entitled to in the capital, profits, as well as contributions towards losses. Partners may therefore prefer to link their initial contributions to their share entitlement in the profits.
Partnership Property	A partnership is not a separate legal entity (unlike a company) and cannot hold assets in its own name. The property is therefore held in the name of individual partners as trustees for the partnership.	To provide certainty, you may add provisions in the agreement in relation to the partners holding the property as tenants in common, terms of occupation etc.
Accounts	There is no specific provision for the partnership to prepare accounts.	It is important to make an express provision in the agreement for a balance sheet as well as profit and loss account to be drawn up in respect of each accounting period.
Relationship between the partners and outsiders	Partners may be jointly responsible for the contractual debts of the partnership. The estate of the deceased partner has several liability for the debts of the firm to the extent that they are not otherwise satisfied. Wrongful acts or omissions by a partner acting in the course of business may give rise to joint and several liability.	It is open to you to make provision in the agreement in relation to the terms of the relationship between the partners as well as outsiders.
Relationship between the partners	Certain terms are implied in the partnership agreement, for example: Entitlement to share capital; Obligation on the partnership to indemnify every partner; Entitlement to interest on advances to the partnership; Requirement that every partner takes part in the management. These terms may be amended in a partnership agreement.	It is open to you to make provision in the agreement in relation to the terms of the relationship between the partners.
Admission of new partners	New partner admissions require unanimous consent.	You can amend the requirement for unanimous consent by making a provision stating otherwise in the partnership agreement.

 

Other relevant provisions in a partnership agreement may also be for parental leave, retirement, and even death; as well as dissolution and winding up of the partnership.

A partnership agreement is a time and cost-efficient way of dealing with issues. They also provide a finite procedure and position should any such issues arise.

The Corporate Commercial Department here at FJG can assist you in drafting a partnership agreement, or advise you in relation to an existing partnership agreement; or otherwise advise you on your position at law generally.

Should you require any further information or assistance please do not hesitate to get in touch – call 01206 700113 or email [email protected].