To deed or not to deed – eight reasons you need a partnership agreement

The start of a new venture, particularly a joint one, is an exciting time. Often the formalities of how the business should best be set up are forgotten in the heady rush of getting the business off the ground. No-one wants to consider what might happen if times are tough or there is a falling out between the individuals involved. Many new joint ventures run along without any written agreement between the individuals governing initial financial contributions and profit shares in the business. Partnerships in which some partners provide the money and others provide the time present particular problems.

At a very early stage in a business’ life, even before any money is made, it is possible that a partnership has already been formed. Most likely it will be a ‘partnership at will’ under the Partnership Act 1890 (the Act).

There is a very broad definition of “partnership” under the Act:

• more than one person
• carrying on business together
• with a view to profit

If there is any dispute in the future, without any agreement setting out the precise terms relating to how the partners will deal with each other, the default provisions in the Act will automatically apply to dictate the relationship between the partners. Those default provisions may be far from what the partners actually want, they include:

1. Equal contributions in capital, profits and losses. This may be fine, but what if one partner has invested (or subsequently invests) more than the others in time or money? Unless there is an agreement as to what should happen in those circumstances, that partner will not get a share of the profits that reflects their larger investment. Should a higher level of investment give that partner a casting vote or right of veto that prevents them from being defeated by a simple majority of the other partners in decisions affecting the partnership business?
2. All partners may take part in management of business. There is no such thing as a ‘silent partner’ or ‘sleeping partner’. Unless there is an agreement to the contrary, all partners get a vote. If you have invested, you have a say – subject to being overruled by the majority. It is also worth considering whether there should be a list of issues on which decisions are required to be unanimous rather than by majority, for example decisions to require the partners to put in more capital, vary the profit shares, admit a new partner, buy or sell premises or open a new office.
3. No partner is entitled to remuneration for acting in the partnership business; they are only entitled to an (equal) share in the profits. This may not be suitable if one partner is doing more work/ introducing more business than the others and wants to be rewarded for that or is engaged full-time working in the business while others only work part-time.
4. Dissolution is always a threat. Any partner may end the partnership at any time. This can be particularly problematic if there is a dispute and one partner uses the threat of dissolution as a lever. It may not be a good time to bring the relationship to an end, for example if the project for which the partnership was established has not reached its conclusion. There is no way for a disenchanted partner to retire other than to dissolve the partnership, unless it is agreed otherwise (when the partnership is set up or at a later date).
5. There is no power for the majority to expel an individual partner unless that has been expressly agreed between them. This can be a game changer for the business. If one partner underperforms or there is misconduct the only option to remove them would be to dissolve the partnership. If there is an otherwise successful business this may not be what the other partners want at all and can decimate the goodwill that the business has built up over time.
6. Similar problems can arise if, for example, one of the partners is affected by long term illness. There should be a mechanism in an agreement by which that partner is allowed to retire without dissolving the partnership. It is also useful to incorporate some succession planning in the partnership agreement if it is intended to continue indefinitely. Age discrimination law complicates the issue (and it is beyond the scope of this article to deal with that), but should the partnership agreement try to oblige partners to retire at a specified age?
7. There are limited restrictions on the future conduct of partners after they have left the partnership unless agreed to in writing. If there is an agreement in place, more onerous restrictions can be placed on exiting partners, for example to prevent the leaver setting up in competition or poaching customers or staff of the business. It is also possible to provide for the majority of partners to put a leaving partner on ‘garden leave’ if it is expressly provided for in an agreement.
8. Every partner is jointly liable with the others for debts and obligations incurred whilst a partner. If there is misconduct by one partner that leads to an obligation for the business, there is no automatic right for the other partners to pass that liability on to the partner who has behaved wrongly.

Similar (although not identical) considerations can apply to all forms of joint enterprise, whether it is a partnership, a limited liability partnership (LLP), or a limited company. It is always best to consider at the outset what the aims of the business are and what the responsibilities of the individuals taking part in the business should be and record them, whether by signing up to a partnership agreement; or a members agreement (for an LLP); or a shareholders’ agreement (for a limited company). Spending a little bit of time on this issue at the outset can avoid the potential for real trouble in the longer run.