Why a Partnership Agreement Is Important and What It Might Cover
Understanding the responsibilities and roles of each partner is crucial when entering into a partnership. This type of business structure is based on the legal structure where each partner has a share in the company and is responsible for its daily running. A contract governing the relationship will provide a solid foundation for business operations, while reducing the risk of disputes.
A partnership contract should address a number of key issues in order to be fully enforced and protect the interests of each party. This article explains the steps to drafting the document, what should be included, the risks associated with not preparing one, and how to proceed at different stages in a partnership relationship. Helix Law is a specialist litigation firm. Helix Law can help you if you are in a dispute with one of your partners. What is a Partnership Agreement?
A contract between business partners that outlines their rights, roles and responsibilities in a company. It is a legally binding contract that shares many similarities with shareholders agreements.
It’s a document entered into at the outset of a business relationship that seeks to codify an agreement on what should happen if certain events take place — almost like a business prenup.
What Does a Partnership Agreement Include?
A well-drafted partnership agreement should include the following elements, although partners can tailor it to meet their specific needs and goals:
Contributions:
How much capital, property, labour, skills, or experience has each partner put into the business?
Ownership:
Who owns shares, and in what proportions?
Daily operations:
Who is responsible for what?
Decision-making
: Who has the authority to make different types of decisions?
Profit and loss:
How much is each partner responsible for?
- Entry and exit: What is the process for leaving the business? How do new partners join?
- Dispute resolution: How will the partners resolve issues between them?
- What Are the Risks of Not Having a Partnership Agreement?In the absence of a formal written arrangement, the relationship is subject to the default legal provisions set out in the Partnership Act 1890 (the ‘Act’), which may not align with the partners’ intentions.
- For example, under Section 9 of the Act, all partners are jointly liable for company debts, even if only one person incurred those debts or did so without consulting the others. The best way to ensure that each partner is responsible for a certain proportion of liabilities is by defining terms in a customized contract.
- A tailored contract is preferable to relying on the Act, which can create uncertainty about the role of each individual within the organization. Section 5 of the Act allows each partner to make binding commitments for the other partners. They may prefer an arrangement that requires at least two partners’ consent to any business contract. Without a written agreement, the chances of a dispute are much higher, which can negatively impact the company’s reputation and stability. In the absence of a partnership agreement, the actions or misfeasance of one partner can significantly harm the others.
- Suppose one partner takes out a car loan as a business expense and fails to pay. Without an agreement stating otherwise, other partners could be held responsible for the debt.
- If contributions are not equal, partners who contribute more will be less likely to receive a fair return without a contract. By default, all profits and losses must be shared equally. A well drafted agreement ensures a fair accounting and equitable distribution of profits. How to Draft a Partnership Agreement
1. Identify the purpose and structure of the business
The contract should include the basics: the partners’ details, the name and purpose of the partnership, as well as the date and duration. The partnership can last for a set period or indefinitely. A clause should be included that explains when and how partners can dissolve or withdraw. Outline financial arrangements
State each person’s capital contribution, how they can make additional investments, and what type of capital will be accepted. Specify the financial responsibilities of partners, such as who is responsible for keeping accurate records and who can reinvest money. Define roles and responsibilities
Identify who is responsible for the business’s day-to-day running and decision-making, and specify if unanimous or majority consent is necessary for certain decisions. The contract can also highlight when partners meet and how they communicate.
4. Address dispute resolution and partnership changes
Include a clause detailing how partners might deal with a dispute. The document should also cover how new partners can be invited or expelled, and how finances will be distributed in the event of dissolution. Seek legal advice
An attorney should draft or review an agreement to ensure that it covers all relevant topics. A legal advisor can also guide partners on the best set-up for their needs and vision. It is important to ensure that the contract complies the laws of England & Wales, otherwise it may not be enforceable.
As expert litigation solicitors, Helix Law does not draft partnership agreements.
We only deal with partnership matters when a dispute arises. What Are the Stages in a Partnership Agreement
1. Initial Partnership
The first stage involves initial discussions and ironing out basic details. Partners discuss their goals, the structure of the company, its name, capital contributions, and basic roles and responsibilities. They will also prepare and sign a partnership agreement, identifying primary terms in order to ensure that they align with their shared vision. Full Partnership
At this stage, the business is fully operational, and the partnership agreement should govern how partners make day-to-day decisions. The agreement should be fully adhered to, with everyone performing their roles effectively and working together in order to promote the continued growth and success of the business. Continuity Planning and Succession Planning
To maintain the business’s resilience and longevity, partners must prepare for possible changes, such as the death or departure of another partner. The contract should address buyouts and succession planning as well as how to introduce new investors. How will a share of the business be transferred if one partner dies, for example? It is important to make revisions over time to adapt the contract to changing circumstances and ensure that it remains valid.
Frequently Asked Questions
Do Partnership Agreements Need To Be In Writing?
Under English law, an oral agreement is binding. It is best to prepare a written partnership agreement for consistency and clarity. A written document is easier to enforce and can be used to prove certain provisions. Written agreements are easier for lawyers to advise and litigate if a partnership dispute cannot be resolved by negotiation. As a consequence, legal costs are often lower.
Is a Partnership Agreement Legally Binding?
Provided the partners execute the document correctly, and it’s signed and dated by every party, it will be legally binding. The contract must be entered into voluntarily and in full knowledge of the implications. A breach of agreement could lead to legal action. Even if there is no written agreement, it’s possible to litigate over a partnership dispute. Can a Partnership Agreement be Modified or Changed?
The contract may be modified, but the method of doing so will depend on its terms. A partnership agreement must specify the mechanisms of its modification, so that the partners can amend it if necessary. Section 19 of Act requires that all parties consent to any change in the absence of contractual provisions. Final Thoughts
A partnership agreement that is well drafted can be a powerful tool to ensure smooth business operations. It also helps to ensure long-term stability.
The document should clearly define each person’s roles, responsibilities, and contributions to minimise the risk of future disputes and ensure the formal relationship aligns with the partners’ intentions rather than the default legal provisions under the Partnership Act 1890.
Partnership disputes often arise out of unforeseen circumstances and events. A well-drafted written agreement will help partners avoid common pitfalls, and protect them from having conflicting expectations in the event of a dispute.
Partnership contracts make it easier to resolve disputes, and they are less expensive. This is true even if the circumstances lead to litigation. By following the steps above and understanding the stages of a new partnership, you can protect your interests while creating a solid foundation for a new venture.
The agreement should be updated to reflect changes in the business and the key players must be prepared to adapt to the growth of the company. If you are forming a new partnership or reviewing an existing one, we recommend that you seek independent legal advice. This will ensure that you have a contract which is watertight.
Helix Law’s expert commercial litigation solicitors don’t draft or advise on new partnership agreements.
