Partnership Agreement Solicitors

What is a Partnership?

A partnership is one of the simplest forms of business and there are very little in the way of legal formalities required to set up business in partnership.

In its most basic form a partnership is defined in the Partnership Act 1890 as ‘the relation which exists between persons carrying on business in common with a view to a profit’.

Is a written Partnership Agreement necessary?

There is no legal requirement to have a written partnership agreement between partners. If there is no written agreement in place this can though cause uncertainty between the partners as to the extent of their rights and obligations as business owners.

In addition, in the absence of clear agreement to the contrary, the Partnership Act 1890 sets out a number of default provisions which apply. These default provisions are not always what partners would wish to apply in practice, as under the Partnership Act:

• There is a right for any partner to dissolve the partnership immediately on notice at any time. This can cause major problems if 1 partner falls out with the others and decides to ‘throw their toys out of the pram’!
• Each partner has a right to share equally in the capital and profits of the partnership (irrespective of their actual contributions to the business in practice).
• Each partner is required to meet the losses of the partnership on an equal basis (even if they only have a limited role in the business).
• Partners have no rights to maternity and paternity leave (unless they otherwise agree so amongst themselves).
• The admission of a new partner requires the unanimous consent of the other partners. This requirement effectively gives any one partner a right of veto over new admissions and can stifle growth.
• Dissolution of the partnership can occur automatically as a result of the death or bankruptcy of any partner. This can have serious consequences for the remaining partners.

More often than not these default provisions are unsuitable for many businesses carrying on in partnership in the modern world and they can cause substantial problems in practice.

We have helped a number of business owners unwind the consequences of either having no partnership agreement in place or worse still the problems that arise by putting in place a poorly thought out partnership agreement.

A properly prepared partnership agreement will clearly set out the partners’ obligations and duties to one another and the basis on which the parties intend to carry on business. We will work with you and your other professional advisers to put in place a carefully prepared agreement after taking a considered approach as to what best suits your business.

What does a partnership agreement cover?

A well drafted agreement will generally cover the following key matters:

• Business name – what name will the partnership operate under? Note that there are special rules which apply to partnership names where the name of the business is different to those of the partners.
• Duration of the partnership – i.e. when did/will the partnership business start and how long will it last for? Partnerships can potentially last for:

1. An indefinite term i.e. they will continue until one of the parties takes steps to terminate the partnership. This is the most common form of partnership.
2. A fixed period of time (although this is relatively unusual).
3. A single purpose or undertaking, which once complete will result in the dissolution of the partnership (again this is less usual in practice).

• Ownership of partnership property – it is essential to be clear at an early stage as to whether assets and property used by the partnership belong to the partnership itself or whether ownership of those assets remains with the individual partner or partners who owned them prior to the business starting. If the partnership is to have a right to use assets or property belonging to the partners then it is important to set out the basis on which the partnership can use those assets/property e.g. if a premises is used by the partnership how much rent is payable, etc.
• Partnership capital – the initial capital contributions attributable to each partner are usually set out in a partnership agreement together with a mechanism to recognise any contributions or reductions that take place in the future.
• Profits and losses – under the Partnership Act 1890 (and as between themselves) all partners have equal entitlements to share in the profits of the business and have equal responsibility for losses unless there is an agreement to the contrary. A partnership agreement will set out each partner’s entitlements and liabilities to share in capital and income profits and losses. Note though that as regards the outside world each partner is generally equally liable for the partnership’s debts and liabilities.
• Drawings – drawings are the sums paid to partners on account of their entitlements to the anticipated profits of the business. A partnership agreement will set out the basis on which drawings are to be paid and a mechanism for repayment in the event of an over drawing.
• Limits on partners’ individual authority – generally speaking partners have wide authority to act on behalf of the business and a partnership may be liable for any actions undertaken by a single partner in the name of the business. A partnership agreement will usually set out any restrictions on an individual partner’s authority to act without the consent of a specified number of partners. If a partner acts in breach of those restrictions then the other partners may have a right of action against them – although in many circumstances the business itself may still be bound by the actions of an individual partner.
• Duties of each partner – a well drafted agreement will set out the amount of time and commitment a partner has to devote to the business and any specific duties they owe or particular role they are to fulfil in the business (e.g. a managing partner or compliance officer).
• Matters which require partner consent – it is normal to include a list of important activities in a partnership agreement which require either all partners or a certain specified % of partners to agree to before the partnership can undertake those activities.
• Holiday and leave entitlements –this can include any rights to take maternity, paternity and any other forms of statutory leave entitlement which partners may not otherwise be entitled to.
• Retirement provisions – this will usually cover: how much notice has to be provided for a partner to retire, whether more than one partner can retire at the same time, how the value of a retiring partner’s interest is to be calculated and paid for and how long the remaining partners have to pay out a retiring partner. Partner retirement requires careful advance planning to avoid undue financial strain on the remaining partners.
• Expulsion of a partner – the circumstances in which the partners can expel another partner from the partnership (and otherwise many of the same considerations as retirement)
• Provisions to deal with the death of a partner – again many of the same considerations as a retirement will apply
• Termination provisions – agreeing specific circumstances in which the partnership can be brought to an end and dissolved
• Post termination restrictions – i.e. restrictions on individual partners carrying on business in competition with the partnership’s business after they cease to be a partner
• Indemnity obligations – these would cover circumstances where a  partner is entitled to an indemnity from their partners or where a partner has to indemnify the other partners in respect of any actions taken by that partner

Speak to our Business Solicitors in South Wales

We have a wealth of experience in preparing, negotiating and advising on partnership agreements for business. We are also well versed in the issues that can arise between partners during the life of a business and can offer practical commercial advice as to how to legislate for those issues in a partnership agreement.

To speak to our expert solicitors in South Wales, contact your local JCP Solicitors office:

• Swansea 
• Caerphilly
• Cardiff
• Carmarthen
• Cowbridge
• Haverfordwest
• St Davids