Written Agreements – Tailor Made For The Modern Partnership

Partnerships are the most popular structure for organisations within the UK, yet many do not have any written Partnership Agreement.

You do not have to have signed an agreement to be a legal partnership and some businesses feel they do not need one, or even that they do not fall within the definition of a legal Partnership itself, meaning they are not bound by Partnership Law.

But not having an agreement can cause real problems. For example if a partner retires or resigns and there is no agreement then the partnership should be dissolved, the business wound up and employees’ employment terminated. The value of the business could be badly hit and everyone then may end up with substantially less cash than if the business were able to continue.

A partnership (often called a firm) is defined by law as simply being a business carried on by two or more persons with a view to profit. Anything falling within this wide definition is subject to the provisions of the Partnership Act 1890, which provides a standard set of rules governing partnerships. However, as the date of the Act suggests, it is often not suitable for the modern partnership in all its various forms.

For example, the 1890 Law states that profits of a partnership are shared equally by the partners. But often partners contribute different proportions of money to the firm, and therefore want to take profits in different proportions.

The 1890 Law also states that every partner has the right to participate in the management of the partnership. This fails to recognise the ‘sleeping’ or ‘silent’ partner who simply contributes money or other assets to the firm.

The 1890 Law does not give partners any specific responsibilities and limits on their authority. This is especially important when partners have different roles or skills, and some have limits on their powers, (for example, spending the firm’s money).

With modern partnerships changing their composition very often, a Partnership Agreement can make provisions for partners to step down without affecting the continuity of the business.

The 1890 Law also prohibits partners from running any business that competes with the firm, or from making any other ‘secret’ profits. Modern partners often have a number of business interests, and a Partnership Agreement can provide for this, or specify whether a partner should work for the firm on a full or part time basis.

A written Partnership Agreement provides a full set of rules and provisions tailored to the needs of the particular business and is an important point of reference when things go wrong.

Experience tells me that in the current economic climate, when businesses are run tightly, partners need to be particularly aware of their duties to the business, their customers, and each other.

The advice of suitably experienced professionals is important when you draw up your Partnership Agreement. Being impartial and objective, they should ensure that the document accurately reflects the different partners’ objectives, contributions and individual responsibilities.

For further information and advice contact Richard Coombs

Published 19/06/2008. The author of this article is Richard Coombs