Taking partners by the hand
Solicitor Vaughan Jones explains why a partnership agreement is essential to protect a partnership business.
There are around half a million businesses in the UK which operate as partnerships rather than as sole traders or limited liability companies,. Commonly associated with professional services such as doctors, accountants and solicitors, partnerships are also widely used in farming businesses.
An arrangement between two or more people who go into business together will probably be a partnership in legal terms, so a properly drawn up partnership agreement which sets out the rights, responsibilities, and the profit and liability share of each partner is definitely recommended. It’s also an opportunity to plan what will happen if the working relationship sours and to protect any financial investments which individual partners may have made.
There are still many businesses operating as partnerships, but without reliable, up to date documentation to back them up in the event of a dispute or a partner leaving. This not to say partners would be entirely without legal protection, but without a written agreement the powers and rights of each partner are dictated by the Partnership Act 1890. This 19th century one-size-fits-all Act could disadvantage some or all of the partners since, under it, all partners are entitled to an equal share of the profits and an equal say in business decisions, regardless of how much cash, property or effort they have put in.
In order to draw up a partnership agreement, you will need to discuss areas such as initial investments, what will happen when someone dies, retires or leaves for some other reason, and how new partners can join, as well as how profits (and losses) will be divided.
The partnership is one of the oldest business arrangements, but modern partners should not rely on laws made more than a century ago to protect their interests, whatever their industry. A robust partnership agreement is essential to set out how the partnership will work.
Vaughan Jones is a Partner at Burnetts. For further information on partnership agreements, contact Vaughan on 01228 552222 or by email to firstname.lastname@example.org.
About the author
Vaughan Jones is Partnership Chair and a specialist in Corporate Law.