The Importance of Partnership Agreements

posted by KeithDaniel

Paul Evans, Associate at Berry Smith, discusses the importance of partnerships having in place a well drafted, up to date partnership agreement.

Many traditional businesses still operate as a partnership instead of incorporating as a limited company.

The partnership model offers a lot of advantages to those who choose to run their business this way. However, some partnerships continue to operate without any written agreement in place or with an antiquated agreement which no longer reflects the commercial reality of the partnership.

We therefore look at the importance of having a Partnership Agreement in place along with the issues faced by a Partnership having an outdated or badly drafted agreement.

No Partnership Agreement

A partnership without a written agreement is referred to as a ‘Partnership at Will’.

The lack of clarity and uncertainty created by a Partnership at Will can potentially lead to disagreements between the partners and could even put the business’ contracts at risk.

In the absence of a formal Partnership Agreement, the partnership will be governed by the Partnership Act 1890 (the “Act”), a very old piece of law which effectively states that, unless there is a contrary agreement between the partners, the business (including the profits, losses, liabilities and any partnership property) is split equally.  Of course, this would immediately cause an issue in a partnership that had senior and junior members who have an unequal share of the business. 

There is no reference in the Act to hours worked, holidays and sickness, or what items are partnership expenses or individual expenses.

Under the Act, in the event that a partner retires or dies, the partnership shall automatically dissolve unless an agreement is entered into providing for its continuation in these circumstances.  An automatic dissolution scenario could have a catastrophic impact on the business and could result in the business being wound up.

Although the Act covers most of the fundamental grounds for setting up a partnership, the above illustrates that it is always advisable for all owners of a business to enter into a formal Partnership Agreement.

Outdated Partnership Agreements

Some businesses have a Partnership Agreement that is outdated and no longer caters for how circumstances may have changed within the business. The partnership constantly evolves and matters such as owners retiring, holiday and sickness entitlement will alter over time. 

The profit and property holding ratios may also change so it is important to keep the Partnership Agreement up to date and reviewed when any major changes occur in the business.

We often see agreements which still include mandatory retirement provisions e.g. that a partner must retire from the business when they reach the age of 65.  If challenged, this could be deemed to be discriminatory under current UK law and such provisions could expose the business to potential claims being brought by retiring partners.

Incomplete Partnership Agreements

We often see situations where a Partnership has an agreement in place, but the terms are badly drafted or do not contain the provisions one would expect to see.

For example, the Partnership Agreement may not cover the terms of property occupancy or how property related costs are to be shared.

We often see agreements not containing a mechanism to deal with expulsion of a problematic business partner. Having the power to remove a disruptive business partner will certainly ease disruption and may avoid a potential dispute in such circumstances. 

It is therefore important to have your Partnership Agreement reviewed to ensure it complies with current practice and standards.

Conclusion

Partnership Agreements are best viewed as an investment and we strongly advise that all businesses have a current and effective agreement in place.  Taking time to put in place a robust agreement should avoid any costly disputes between owners, prevent risk to the business and ensure clarity between the partners as to the commercial terms of the business.

For more information about Partnership Agreements, or any other similar topic, please contact Paul Evans on 029 2034 5511 or by email - pevans@berrysmith.com

 

Paul Evans is an Associate in the Corporate Finance Department at Berry Smith Lawyers advising business owners and individuals on acquiring or selling businesses, shareholder/investment agreements, corporate restructures, joint ventures and general corporate advice. Paul also heads up the Healthcare department, providing legal advice to GPs, dentists and other healthcare professionals.