The Why's and What's of a Partnership Agreement

Partnership is defined by the Partnership Act 1890 as “carrying on a business in common with others with a view to making a profit”. There are few formalities needed by law to create a partnership but it is a good idea to do more than the minimum the law requires, especially because in old-style partnerships, a partner has unlimited liability including for the acts or omissions of other partners which may not have been authorised.

If you do not have a formal agreement, the Partnership Act sets out a default position including, for example, that each partner is entitled to receive an equal share of profits and that the partnership is a “partnership at will” which means that any partner can immediately bring the partnership to an end by notice or by dying. The partnership is then liable to be wound up and all the assets may be sold.  This is obviously not a stable arrangement for any business.  To avoid these consequences, it is necessary to have a clear written partnership agreement.

A partnership agreement is a hybrid form of agreement which essentially covers two functions: it includes the “employment” terms relating to the working arrangements for each partner – their duties, holiday and sickness entitlement, their profit entitlement, and provisions allowing for their suspension, expulsion or retirement etc and the “business” terms setting out how the business will be run – do important decisions require a super majority vote? What are the limits of a partner’s authority to make business decisions or enter contracts on behalf of the partnership? What is the process if a partner leaves? There will also be terms to exclude some of the unhelpful, default terms implied by the “Partnership Act 1890” so for example it will confirm that the death or departure of one partner will not lead to the partnership being automatically wound up.  You may also include restrictive covenants to prevent a partner from competing with the business or poaching clients or staff for a period of time after that partner leaves.

Partnership has traditionally been favoured as a vehicle for professions to carry out their practices, although many now use limited liability partnerships, a hybrid form of partnership introduced in 2005 allowing partners the protection of limited liability.   Clarkson Wright & Jakes advise partnerships, particularly in the medical sector, where NHS contracts are not generally awarded to LLPs and so doctors often work in the traditional form of partnership.  If there is a change in the partnership or you are being asked to join a partnership, we would be pleased to review the terms and scope of your obligations for you.

To speak to a member of our Corporate and Commercial team, please contact 01689 887863.