If you are setting up a business, you may be wondering if you should have a Partnership Agreement, and what it would include.
The answer to this is that without it, there can be uncertainties as to the relationship between the partners and how the partnership should be run. For example, in the absence of a partnership agreement, on the death of a partner, the partnership has to be dissolved. Unless there are only two partners, this might not be in the interests of the surviving partners who wish to keep the partnership going.
Similarly, in the absence of any agreement to the contrary, the partners have the right to share equally in the capital and profits of the business.
Problems which can be encountered with the general law can be avoided by a properly drafted partnership Agreement, which can set out clear rules concerning such matters as capital and profit shares, drawings on account of profit, management and decision making, permitted partnership expenses, retirement and expulsion or death of a partner (and the financial consequences of retirement, death or expulsion).
Definition of Partnership
Under the English Partnership Act 1890 (“PA”) partnership is defined as ‘the relation that subsists between persons carrying on a business in common with a view to profit’.
There are no specific legal requirements that govern the formation of a partnership. The PA governs the relationship unless there is a partnership agreement.
Partnership is a private matter and there is no public register that contains information concerning partnerships. (This is not true of limited liability partnerships which were introduced in 2002 in the UK).
Legal Status of Partnerships
A partnership does not have a separate legal personality apart from its members in a way that a limited company does. As a consequence, the partners are jointly and severally liable for the obligations of the partnership i.e. each partner can be sued for the full amount of any liability of the partnership. There is no limit on liability.
Duties of Partners
These arise from the partnership agreement, where there is one. In addition, partners are agents of the firm and their other partners. They also have a fiduciary relationship to each other – e.g. a duty to account and disclose information concerning their activities in relation to the partnership.
Authority of Partners
Each partner has the power to bind his partners and make them liable on business transactions which are carried out in the name of the partnership. (This power can be limited internally but if the internal agreement is breached, the partnership might still have a liability to a third party who entered into a contract in the belief that he was contracting with the partnership).