The importance of Partnership Agreements

The importance of Partnership Agreements

For many people getting involved in a business venture with others they know and trust is all about planning what they will do to make their business successful. It usually involves a multitude of issues focussing on finances, getting the product or service in front of prospective clients, selling and service levels.

But for most business ventures a time will probably come when relying on ‘what was said when you set-up’ is not going to work so well. If things are not working out as planned or someone wants to move on and sell their share of the business, how do you deal with it if you cannot agree between yourselves?

In the absence of a Partnership Agreement (“PA”) The Partnership Act 1890 provides the rules that govern a partnership.  Significantly, all partners are entitled to share the profits equally no matter how much capital,
effort or skill they bring into the business and any partner can bring the partnership to an end by giving notice to all the other partners. Also, if one partner dies the partnership is automatically dissolved.

With a PA in place there is an agreed written structure to your business, which can spell out each partner’s responsibilities, rights, profit/liability sharing, how to go about entering and leaving the business and also the terms on which disputes are resolved.

Typically PAs cover duties of partners, management, salaries, allocation of profits, borrowing money & reimbursement, non-competition, powers of attorney, meetings, admission of new partners, leaving or retiring, termination and dispute resolution.

Many people take the view that having a Partnership Agreement is like ‘planning for divorce whilst getting engaged’ but it is not like that really. It is a practical device to ensure the business has proper foundations to deal with a range of fundamental issues that will come up at some time or other. If you don’t agree how these matters are to be regulated when you are setting up or during the ‘honeymoon period’ of you partnership just imagine how difficult and costly it could be to deal with if things were not going so well between partners or one partner loses mental capacity.

This Article has been written by Bill Ryan of Lawscape, specialists in Employment Law and Will writing. Bill can prepare Partnership or Shareholder Agreements designed to suit your business.