If you set up in business with one or more other folks along with wish to create a limited company, a partnership arrangement will be deemed to exist at law without necessity to get a formal contract. However, whilst a written partnership agreement just isn’t needed to form a partnership, if you wish to avoid uncertainty as well as the automatic using potentially unsuitable statutory law, a formal agreement is a wise investment.
What happens if we dont sign a Partnership Agreement?
Without a written agreement, the provisions of the 1890 Partnership Act will apply. In essence, these state that all the partners are equal and share profits, losses, start-up and running costs plus the workload equally. Whilst the provisions are intended to provide an equitable framework for running your business, the truth is, you can find significant implications. For instance;
- all partners will be eligible for share the profits equally regardless how much capital, effort or skill they bring to the business
- any partner can bring the partnership to an end simply by giving notice to any or all one other partners as well as the partnership will automatically dissolve if a partner dies
- all partners will be jointly and severally liable for the liabilities suffered by the organization. This means that if a person partner assumes a commitment and fails to deliver about it, you will be equally liable to rectify the problem. And if a debt can’t be paid, then your creditor may pursue each of you individually, and thus one of you may be forced to the position of handing over the entire debt all on your own
- should someone enter into financial difficulties then his or her creditors can take assets from your partnership to settle them
- all partners will be considered “agents” of the business therefore can act on behalf of the other partners. This implies a person might enter contractual and financial arrangements that are not good for the business, however these will be binding
- all partners provide an equal say in the business, which means that normally it takes time for you to reach decisions. Unresolved disputes may increase the risk for breakdown of the business.
What benefits will a Partnership Agreement offer?
A partnership agreement provides a written structure to your business clearly aiming each partner’s responsibilities, rights, profit/liability sharing, rules associated with business entry and exit, and also the terms which disputes are resolved as well as the partnership could be terminated. Carefully drafted, it’s going to make certain you use a common vision for the business with mutually agreed goals. Critically, it’s going to help avoid costly misunderstandings and conflict.
Key areas to pay in your partnership agreement include:
a) ownership interests, taking into consideration any cash, assets, loans or investments produced by individual partners
b} salaries and compensation: how will profits or losses be allocated?
c} how the partnership will be managed
d) each partners specific responsibilities within the business, and what level of performance is expected from them
e) whether partners expected to make a full-time commitment to the venture, or are permitted involvement in other business activities
f) what processes should be followed if one partner wants to leave the partnership or a new partner is admitted
g) whether partners will be allowed to sell their interests in the business to outsiders and, if so, how will their share be valued
h) on what grounds a partner can be expelled from the partnership (e.g. misconduct, non-performance of duties)
How do I put a Partnership Agreement in place?
While there are many internet sites offering seemingly cheap pro forma partnership agreements, this can be a false economy for several reasons:
1) there are three different kinds of partnership: general partnerships, limited liability partnerships and limited partnerships you need to be sure that you set up the appropriate vehicle for your needs;
2) no two partnerships will be alike in terms of specific requirements;
3. you are unlikely to reach amicable consensus on an agreement without involving an impartial third party advisor;
4) without using a solicitor, you cant be sure that the agreement complies with partnership laws.
A better way to save money is to do some preparation before instructing your solicitor: get together with your partners and compile a list of provisions that you wish to include in your partnership agreement. Your solicitor will then have a good starting point from which to clarify your requirements and draft a suitable agreement. However, since one lawyer cannot represent the interests of all partners, each partner will need to instruct their own solicitor to review the final document on their behalf.
