Basic principles of Partnership Agreements
- AuthorAndrea Smith
A basic partnership is easy to form; just carrying on in business with another, intending to profit, gives rise to a partnership by law. However, as partners, you will have very little protection and could face a claim, fail to receive a just return on your investment or find yourself in a difficult situation where you cannot remove a troublesome partner.
Limitations on Liability
With a basic partnership, each partner will be jointly and severally liable for the actions of all of the partners. Therefore, in the unfortunate event that the partnership faces a claim, you personally are responsible even if it was not your actions that caused the problem. This can be avoided by setting up as a Limited Liability Partnership (an LLP). Not doing so could expose you to great personal risk. That is not to say that the best way forward is for all partnerships is as an LLP but limiting personal liability is certainly something that should be considered.
Division of Profits
The absence of a partnership agreement, each partner is entitled to an equal share of the profits. Consider though the situation where one partner invests more than the others. For example, they could invest more time, more capital or even individually own the premises from which the partnership operates. That partner has no right to a greater share of the profits or capital than the others and unless the terms of occupation and use of the premises is clear there is a risk that property could be deemed a partnership asset. If the property is a partnership asset, the other partners would all be beneficially entitled to an equal share of that partner’s property. Therefore, partners should always consider putting into place a partnership agreement to make it clear as to how profits and assets will be be shared.
Governing the Relationship
A partnership agreement isn’t just used to determine division of profits but to govern the relationships between the partners. In the event that someone falls seriously ill, for example, the agreement will dictate what will happen and how the partnership can proceed. Another key consideration is removing partners. Without an agreement, there is no right to exclude a partner even if, for example, they are acting negligently or recklessly. A partnership agreement can govern this and allow for removal of a partner and help to protect the remaining partners.
These are but a few considerations and concerns relating to partnerships. As a partner, you should ensure that you are adequately protected and that the relationship is effectively governed to prevent significant risks, costs and claims arising in the future.
For more information or advice on partnership agreements please feel free to contact me on 01604 828282 or via email