Written By Marina Akram
When you enter a business partnership, having a clear understanding of each partner’s rights, responsibilities, and obligations is essential for long-term success. Under English law, partnerships are primarily governed by the Partnership Act 1890 (PA 1890), which outlines general rules for partnerships. However, relying solely on this Act can lead to complications, as it doesn’t provide a complete framework for running a partnership. This is where a Partnership Agreement becomes invaluable.
What Is a Partnership?
A partnership is defined by the PA 1890 as a relationship between two or more individuals conducting business together with the intent of making a profit. Importantly, a partnership is not a separate legal entity. This means:
Each partner is jointly liable for the partnership’s debts and obligations.
Any partner can act as an agent for the partnership and bind the business to agreements made in the ordinary course of business.
Partners owe a duty of good faith to one another.
Why Do You Need a Partnership Agreement?
Without a Partnership Agreement, your business will default to the provisions set out in the PA 1890. While these rules provide a baseline, they may not align with your specific business needs and could lead to disputes. A Partnership Agreement offers clarity, structure, and protection for both the business and the partners by outlining the key terms of your working relationship.
What Should a Partnership Agreement Include?
A well-drafted Partnership Agreement can be tailored to your specific business and may include provisions such as:
The type of business and how it operates.
Details about partners’ responsibilities, duties, and authority.
Rules regarding the allocation of profits, losses, and capital contributions.
Policies for leave, including maternity, paternity, and sick pay.
How decisions are made and disputes are resolved.
Procedures for adding or removing partners and handling retirement or termination of the partnership.
By addressing these areas, a Partnership Agreement helps to pre-empt conflicts and ensures that all partners are on the same page about key aspects of the business.
The Risks of Not Having a Partnership Agreement
Without a Partnership Agreement, your business is subject to the default rules of the PA 1890, which include:
Equal sharing of profits and losses, regardless of the partners’ contributions.
No partner receiving remuneration for their role in the business.
Unanimous consent required for introducing new partners.
These default rules may not reflect the realities or expectations of your business, potentially causing disputes.
The Benefits of a Partnership Agreement
Having a Partnership Agreement offers several advantages:
- Clarity – It provides clear guidelines on profit-sharing, decision-making, and other crucial areas.
- Conflict Prevention – By pre-empting potential disagreements, it reduces the risk of costly disputes.
- Flexibility – It overrides the default provisions of the PA 1890, allowing partners to set their own rules.
- Protection – It reinforces unwritten rules and ensures everyone is working toward the same goals.
Our Advice
Whether you’re starting a new partnership or have been operating without a formal agreement, now is the time to act. A Partnership Agreement is an investment in your business’s future, providing clarity, structure, and protection.
If your business does not have a Partnership Agreement, we recommend drafting one tailored to your needs as soon as possible.
For partnerships with existing agreements, it’s important to review and update them regularly, especially after significant changes in circumstances or the addition of new partners.
Contact Silverback Law today for expert advice and assistance in drafting or reviewing your Partnership Agreement. Our experienced team can help ensure your business is fully protected and operating smoothly.
Marina Akram
Assistant Head of Commercial Litigation