Partnerships (when a business is run by at least two partners) are currently one of the most popular business structures.
Forming a partnership means the workload is shared, enabling each partner to specialise in their own area of the business, and more finance can be raised thanks to greater investment from the owners and a higher chance of securing bank loans.
Due to the liability for other partners’ debt, it is wisest to go into partnership with someone you trust and who will bring new skills to the venture as well as seek to put in place sufficient protections for each partner by means of a partnership agreement
However, things can still go wrong, and business partners may fall out, which is why you should draw up a partnership agreement before you start.
What is a partnership agreement and why should you have one?
A partnership agreement outlines amongst other things the rights, responsibilities, and profit shares (and losses) of each partner.
It will also confirm whether you are entering an ordinary partnership or a limited liability partnership (LLP).
The primary purpose of a partnership agreement is to protect the partners’ investment in the firm and to establish a fair relationship between them.
Disagreements will occur in any partnership, which can result in partners dissolving the business if an agreement can’t be reached.
By laying out each partner’s rights and responsibilities clearly, a partnership agreement can help to reduce the risk of disputes and provide clear processes for resolving any disagreements that do arise.
Without such an agreement, conflicts will be settled according to either The Partnership Act 1890 or The Limited Partnership Act 1907, which may produce an unsatisfactory result in some cases.
What should be contained in a partnership agreement?
A partnership agreement sets out detailed and practical rules for the firm and its partners, and should generally cover:
- The percentage ownership for the business.
- What each partner will contribute to the business and the role they will play.
- Decision making and voting rights, including which circumstances will require a joint decision and which actions to take if the partners can’t agree.
- How the profits will be shared, when the partners can withdraw this money, and any reinvestment back into the business.
- The amount of money each partner can draw from the business and the limit on the amount of expenses that can be claimed.
- The level of liability each partner will be responsible for as well as any contributions from other partners for any liability amongst one another.
- How to split a partner’s share in the business in the unfortunate event of their death or incapacity.
If you anticipate bringing in new partners in the future, you should outline terms and conditions for new joiners, what their level of investment should be, and their rights and benefits.
You can also include details regarding how the business will continue to be run in the event of a partner’s retirement, as well as under what circumstances a partner can be dismissed and any payout they will receive.
You may wish to restrict the type of employment a partner can go into if they leave, especially in terms of not being in direct competition.
Additionally, you can put in place agreed dispute resolution methods in the event that disagreements arise in the partnership.
Any issues that are not included within the agreement will be determined by the statutory rules, which can be inadequate and impractical.
Finally, you should arrange how the business will be split between the partners if it ceases to trade.
Prepare your partnership agreement with Palmers Solicitors
It is essential to seek independent legal advice before defining your level of commitment to the business.
An experienced solicitor can advise you on your rights and draft a partnership agreement that is legally sound and is fair to all parties.
It is important that all the partners are present when the document is created and that they all sign it to confirm they understand and agree to the terms contained within.
Our company and commercial solicitors can advise you on how your firm might benefit from a partnership agreement and can draft an agreement appropriate to the needs of your firm.
For further advice on entering a partnership agreement, please contact our team to discuss your needs.