Why Have A Partnership Agreement?

Partnerships can often start without the partners even realising it. The existence of a partnership is a matter of fact; a partnership is formed when two or more people start carrying on business together with a view to making a profit.

In the absence of a partnership agreement the provisions of the Partnership Act 1890 (PA 1890) and case-law will apply to offer solutions to any problems that might arise between the partners. For example, according to s. 26 of the PA 1890, unless otherwise agreed, a partnership is automatically dissolved when one of the partners gives notice of his intention to leave. The partnership has to be wound up. But what happens if the rest of the partners wish to continue?

Another example is the sharing of profits and losses. According to s. 24 of the PA 1890 all partners are entitled to an equal share in the profits of the business but also obliged to share equally the losses regardless of their original capital contribution. But what if a partner is not involved in the day-to-day management of the partnership? Why should he/she be liable equally with the managing partners for any losses or why should he/she share equally with them the profits they worked so hard for?

A carefully drafted partnership agreement will have provisions tailored to the individual circumstances of the partners. It will set the necessary basis for the future success of the business and provide solutions for future hurdles thus saving time and money. An agreement designed according to the specific wishes and needs of the partners will give them a clear idea of the business and their rights and obligations. Instead of risking constantly arguing over every decision, through the agreement the partners will decide at an early stage how they want to run the business, share the profits and losses, how new partners can enter and old ones leave and what happens when the business is dissolved.

Of course nobody can foresee every situation that might arise during the business life of a partnership but a well drafted agreement will provide solutions and a personalised safety net to fall back when things don’t go according to plan. It is always better to think ahead and decide calmly and rationally instead of trying to find a solution when difficulties arise and decisions have to be made fast. The main goal is to run a successful business that all partners can benefit from and a partnership agreement can help achieve just that.

At CH Legal our team of expert business solicitors will help you draft a partnership agreement tailored to your specific needs and circumstances. Niki is a member of CH Legal’s Commercial Team and can be contacted by email at niki.polymeridou@ch-legal.co.uk or by telephone on 0161 745 9170.