What is a partnership?
A traditional partnership is defined as the relationship which “subsists between persons carrying on a business in common with a view of profit”. It is a wide definition and can capture and wide range of commercial ventures which involve two or more people.
Partnerships can be created between individuals or between companies (or a combination of both). It is a question of fact in each case as to whether there is a partnership in place. If there is, and there is no partnership agreement, then the default position is that the law under the Partnership Act 1890 will apply. As the date suggests, this act is very out of date and does not take into account the modern ways of conducting business.
What is a partnership agreement and why is it important to have one in place?
A partnership agreement is a legal document that outlines the rights, responsibilities and expectations of each partner in a partnership business venture. It serves as a roadmap for how the partnership will operate and defines the terms and conditions under which the partners will collaborate. Having this document in place is crucial because it helps prevent misunderstandings, disputes and potential legal issues down the line. As mentioned above, without a partnership agreement the Partnership Act 1890 applies so it’s important to have a partnership agreement in place to ensure that the law which applies to your partnership is modern and doesn’t hold you back.
Can’t we just rely on verbal agreements or handshake deals?
While verbal agreements and handshake deals might work in some cases, they can lead to significant problems in the future. What was actually agreed may be remembered or understood differently by the partners involved. A written partnership agreement provides clear documentation of the terms both partners agreed upon, reducing the likelihood of disagreements and ensuring everyone is on the same page.
By definition, the partners will be on good terms before the partnership starts (on the basis that you wouldn’t go into business with someone you don’t like!). This is the reason why many businesses don’t have a partnership agreement in place. However, it is important to put an agreement in place to cover the eventuality that the partners fall out. It is better to put in place a written agreement which sets out the rights and responsibilities of each partner than having to go through expensive and costly court proceedings if something goes wrong.
What are the key benefits of having a partnership agreement?
- Clarity: A partnership agreement clearly defines each partner’s role, responsibilities, and expectations. This clarity minimises misunderstandings and ensures that everyone knows what is expected of them.
- Dispute Resolution: The agreement outlines procedures for resolving disputes, whether they relate to decision-making, profit-sharing, or other matters. This can save time, money and stress in the long run.
- Exit Strategies: A well-drafted agreement addresses what happens if one partner wants to leave the partnership or if unforeseen circumstances arise. This can include buyout provisions, valuation methods and transition plans.
- Profit Sharing: The partnership agreement spells out how profits and losses will be distributed among partners, avoiding confusion and potential conflicts over financial matters.
- Decision Making: It defines the decision-making process, including who has authority in different areas of the business, if required. This ensures efficient operations and avoids power struggles.
Can a partnership agreement be tailored to our specific needs?
Absolutely, that is the point of a partnership agreement. There is not a ‘one-size-fits-all’ approach. The agreement can be and definitely should be customised to suit the unique needs, structure and goals of your partnership. Whether you are starting a small business, a creative endeavour or any other collaborative venture, the agreement can be tailored to reflect your vision.
When should we create a partnership agreement?
The best time to create a partnership agreement is at the inception of the partnership, when everyone is enthusiastic and on the same page. Waiting until conflicts arise or the partnership has grown can make it more challenging to reach an agreement that satisfies all parties.
Do we need a solicitor to draft a partnership agreement?
We would highly recommend that you instruct a solicitor to draft the partnership agreement. A solicitor specialising in partnership law can help ensure that all legal aspects are covered, the agreement is comprehensive and that it is an asset to your business rather than a hinderance. The partnership agreement should complement how your business operates in practice.
If you need assistance with your partnership agreement, please contact the Corporate and Commercial Team at Savage Silk on 0345 209 4700.
Please note that this article is for information purposes only and it is not intended to be legal advice. It is always advisable to obtain independent legal advice from a solicitor before you sign any documentation.
Chris Morgan, Senior Associate, Corporate and Commercial