Legal Matters – Why Do I Need A Partnership Agreement?

As part of our ‘Ask An Expert‘ series, a legal professional tells us why the need for a partnership agreement – Christian Mancier is a Corporate & Commercial Partner at Gorvins Solicitors specialising in all aspects of Commercial law including Partnership Agreements.

A formal Partnership Agreement enables the partners of your company to significantly deviate from the default position and tailor your agreement to the needs of your business, the partners and you as an individual.

The Partnership Act 1890 still governs the law relating to Partnerships – It sets out the default rules that apply to all partnerships unless otherwise agreed. 

This act dates back to when business was mostly conducted through the medium of partnerships before a shift towards limited companies. However, considering the legislation has not been updated in any significant form since this time it is now an old-fashioned and out-dated way of doing business in the 21st century.

A properly written Partnership Agreement will cover a number of highly important matters, which are highlighted below:

Dissolving A Partnership

Considering the age of the Partnership Act 1890, some of the measures are quite draconian, particularly when it comes to terminating, or ‘dissolving’, the Partnership.

Under the default position, if a Partner desires to exit the Partnership, for example if they wish to retire, they can serve notice and the Partnership has to be dissolved.

This dissolution of a Partnership formally brings it to an end and can either – Start a new one between the remaining Partners or it can involve a partnership winding up its business, collecting in its debts, settling its liabilities and returning any surplus cash equally amongst the Partners.

Without a Partnership Agreement in place, flexibility in being able to carry on amongst the remaining partners is severely limited as there is no option for the remaining partners to buy out the partner who wants to leave. With an agreement however, such arrangements can be clarified.

Death Of A Business Partner

Similar to the above point, the death of a business partner means the Partnership must be automatically dissolved unless agreed to the contrary. Therefore, entering into a written Partnership Agreement is vitally important so there is a mechanism to allow the Partnership to continue if one dies or exits.

The formal agreement will set out how the partnership is to be continued and how the exiting Partner is paid for their share of the Partnership without having to go through the upheaval of a formal dissolution of the Partnership each time this happens.

Other reasons for a partnership agreement –

  • Entitlements to share in the capital and profits.
  • Day-to-day operational matters around decision making and limits of authority.
  • A mechanism for dealing with the death or retirement from the partnership.
  • A mechanism for calculating the sums due to an out-going Partner and how and when these sums are paid.
  • Potential restrictions on the Partners from being involved with competing businesses going forward.
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