Partnership Agreement Lawyers in Essex – Romford, Upminster, Brentwood
Everything you need to know about Partnership Contract Law
If you are considering going into business with a partner or group of partners it is highly advisable to enter into a partnership agreement.
What is a Partnership Agreement?
It is defined in the Partnership Act 1890 as ‘the relation which subsists between persons carrying on a business in common with a view of profit’.
A partnership is a relationship between individual partners. Partners are jointly liable with the other partners for all the debts and obligations that the partnership incurs while they are a partner. On the positive side the partners between them own all the assets and are entitled to all the profits generated by the partnership.
Why Do You Need a Partnership Agreement?
Whether you choose to operate as a partnership, a limited liability partnership or a limited company is often a matter of tax. Partnerships offer more flexibility but companies and limited liability partnership have the benefit of limiting the liability of the shareholders (in a company) and the members (in a limited liability partnership).
If you choose to move forwards in partnership with others, you should ensure you have in place a partnership agreement which sets out how the profits and losses are shared between you and what happens if one of the partners want to retire or leave the partnership.
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Partnership agreements are crucial for several reasons:
Protect partners’ interests and investments
You can include in the partnership agreement outlines of the partner’s responsibilities and contributions as well as ownership percentages. This will help protect individual investments, avoid misunderstandings and ensures the partners understand their obligations and rights.
Prevent and resolve partnership disputes
It is always possible for disagreements to arise in any business relationships but a partnership agreement can provide a framework for resolving conflicts. This can help maintain relationships and avoid costly litigation.
Facilitate smooth transitions when partners join or leave
Partnerships can change over time due to new partners joining or existing partners leaving. A partnership agreement can address a framework or process for these transitions ensuring continuity and stability in the business.
Ensure compliance with UK partnership law
Partnership agreements help ensure that the partnership operates within the legal framework set by English law. This helps to minimise legal risks and ensuring compliance with regulatory standards.
Types of Partnerships Requiring Agreements:
General Partnerships
A general partnership under English law is a type of business structure where two or more individuals (or entities) come together to operate a business, where they agree to share responsibilities, liabilities and profits. Here are the key features and characteristics:
- Formation
- No Formal Registration: A general partnership can be formed without formal registration, although it is advisable to have a written partnership agreement.
- Agreement: Partners can enter into a partnership through a verbal agreement, but a written agreement helps clarify roles, responsibilities, and profit-sharing.
- Liability
- Unlimited Liability: In a general partnership, partners have unlimited liability, meaning they are personally responsible for the debts and obligations of the partnership. This means personal assets may be at risk if the business incurs debt or is sued.
- Management and Control
- Equal Rights: Unless stated otherwise in a partnership agreement, all partners typically have equal rights in managing the business and making decisions.
- Consensus: Decisions are usually made collectively, promoting collaboration among partners.
- Profit Sharing
- Distribution of Profits: Profits are generally shared among partners as outlined in the partnership agreement. If there is no agreement, profits are typically shared equally.
- Legal Status
- Not a Separate Legal Entity: A general partnership is not a separate legal entity; instead, it is considered an extension of the partners themselves. This means partners can be sued individually or collectively.
- Compliance with Laws
- Partnership Act 1890: General partnerships in England are governed by the Partnership Act 1890, which outlines the rights and responsibilities of partners, as well as the rules for the operation of partnerships.
- Dissolution
- Termination of Partnership: A general partnership can be dissolved by mutual agreement, the expiration of a term, or the occurrence of specific events (like the death of a partner). The process for dissolution should ideally be defined in the partnership agreement.
General partnerships are straightforward business structures that offer flexibility and ease of formation, but they do also come with significant risks due to the unlimited liability of partners. Having a clear partnership agreement is essential to ensure smooth operations and protect the interests of everyone involved.
Limited Liability Partnerships (LLPs)
An LLP is cross between a partnership and a limited company. Like a company, an LLP must be formed by application to, and be registered at, Companies House and it must disclose information about itself on the public register, including details of its registered office, its members, its accounts and reports and its charges.
There are different types of membership status in an LLP depending on how much day to day control each member has with the running of the business. The members of an LLP enjoy limited liability up to the amount of any financial contribution to the LLP.
An LLP is taxed like a partnership which, depending on your own circumstances, may make an LLP an attractive business vehicle. Also like a partnership, you must have a minimum of two members for an LLP to exist.
If you do choose an LLP, then you will need an LLP Agreement which sets out the relationship between the members of the LLP. It covers many of the same areas as a partnership agreement and a shareholders’ agreement. The agreement will set out the duties and obligations of the different types of members, their share of the profits and losses and provisions for what happens when a member wants to exit the LLP. A member is likely to have accrued a capital account which the LLP is obligated to pay back to them when they leave. The LLP agreement can set out the time period over which payment is made and the frequency of the payments. Without these details a debt is created which can be called in on demand.
Joint Ventures and Strategic Alliances
A joint venture is a commercial arrangement between two or more individuals or businesses. If you do not have the required resources to be able to develop a certain aspect of your business, then one option may be a joint venture between two independent bodies.
At Mullis & Peake LLP, we frequently guide clients through the complicated process of forming and managing joint ventures.
Key Elements of Partnership Agreements
Defining Partnership Structure and Ownership
This element outlines the type of partnership (general, limited, or limited liability) and details each partner’s ownership percentage. Ownership stakes determine the financial interests of each partner and can influence decision-making power and profit-sharing.
Profit and loss sharing arrangements
The agreement should specify how profits and losses will be distributed among partners. This can be based on ownership percentages or agreed-upon ratios. Clear arrangements help prevent disputes and ensure that all partners understand their financial entitlements.
Partner roles, responsibilities and time commitments
Defining the roles and responsibilities of each partner is crucial for accountability. This section outlines specific duties, areas of management, and expected time commitments, ensuring that all partners contribute fairly to the partnership's success.
Decision-making processes and dispute resolution mechanisms
This part of the agreement establishes how decisions will be made—whether by majority vote, unanimous consent, or another method. It should also include mechanisms for resolving disputes, such as mediation or arbitration, to help maintain a harmonious partnership.
Partner admission and withdrawal procedures
The agreement should detail the process for admitting new partners and the procedure for existing partners to withdraw from the partnership. This includes any buyout provisions and how valuations will be determined, ensuring smooth transitions and lessen disruptions.
Intellectual property and confidentiality provisions
This section addresses the ownership of any intellectual property created during the partnership and establishes confidentiality obligations for partners. Protecting sensitive information and intellectual property is crucial for maintaining competitive advantages.
Non-compete and non-solicitation covenants
These provisions prevent partners from engaging in competing businesses or soliciting clients or employees of the partnership during and after their involvement. Such covenants help protect the partnership's interests and reduce the risk of unfair competition.
The Partnership Agreement Drafting Process:
Initial Consultation and Fact-Finding
The first step in the process is a fact finding exercise so that we can have a complete understanding of the business and what the requirements are for the agreement. We will send a detailed questionnaire which will help us confirm our instructions and provide the basis for the drafting process.
Customising the Agreement to Client Needs
The next step in drafting a partnership agreement is tailoring the agreement to fit the needs of the client as determined in the initial fact-finding process. Personalisation ensures that the agreement reflects the partners' intentions regarding profit-sharing, roles, responsibilities, and decision-making processes. Legal advisors may conduct interviews and gather relevant information to tailor the agreement, making it as comprehensive and relevant as possible for the specific partnership context.
Negotiating and Finalising the Agreement
Once a draft is prepared, partners enter the negotiation phase. This step is vital for addressing any concerns and ensuring that all parties are comfortable with the terms outlined in the agreement. Partners may discuss various aspects, such as profit distribution, roles, and decision-making authority, making adjustments as needed. After thorough discussions and revisions, the agreement is finalised. It’s important that all partners review the final document carefully, ideally with legal advice, to ensure that it meets everyone’s needs and complies with applicable laws.
Ongoing Review and Updates
Partnership agreements should not be static; they require ongoing review and updates as the business evolves. Partners should regularly assess the agreement to ensure it continues to reflect their current situation, especially during significant changes such as new partners joining, changes in business operations, or shifts in the market.
Choosing the Right Partnership Agreement Lawyer. Trust Mullis & Peake Team to Protect your interests.
Frequently asked questions
If there’s a disagreement among partners, the first step is to refer to the partnership agreement, which may outline specific procedures for resolving disputes, such as, mediation or arbitration. Open communication is crucial, as discussing the issue can often lead to a resolution. If informal discussions fail, partners can seek mediation from a neutral third party, and if that doesn't work, arbitration may be pursued, where an arbitrator makes a binding decision. Legal action is generally considered a last resort due to its cost and complexity. Having clear dispute resolution mechanisms in the partnership agreement can help guide partners through conflicts effectively.
A partnership agreement and a shareholders' agreement serve similar purposes in governing the relationships and responsibilities among members of a business, but they apply to different structures. A partnership agreement is specific to partnerships, outlining the terms of collaboration, profit-sharing, roles, and responsibilities among partners, typically in a business owned directly by individuals. In contrast, a shareholders' agreement is used in companies and governs the rights and obligations of shareholders, including issues like share transfers, voting rights, and corporate governance. Essentially, the former focuses on interpersonal relationships and business operations among partners, while the latter addresses the rights and duties of individuals who own shares in a company.
Yes, a partnership agreement can and often should include clauses for exit strategies. These clauses outline the procedures for a partner to withdraw from the partnership, including buyout terms, valuation methods for the partner's interest, and any conditions that must be met for the exit. Having clear exit strategies helps prevent disputes and provides a structured approach for handling the departure of a partner, whether due to voluntary withdrawal, retirement, or other reasons. This foresight ensures that the remaining partners can continue operations smoothly and that the exiting partner receives fair compensation for their investment in the business.
A partnership agreement typically includes provisions to address the death of a partner, ensuring a clear process for handling such an event. These provisions often outline how the deceased partner's interest will be valued and transferred, commonly to their heirs or the remaining partners. The agreement may specify whether the partnership will continue, and if so, it can detail buyout terms to compensate the deceased partner’s estate for their share. By including these clauses, the partnership agreement helps minimise disruptions, provides financial clarity, and protects the interests of both the surviving partners and the deceased partner’s family.
If you do not have a partnership agreement, then the only provisions that will apply to the partnership are those provisions that are set out in the Partnership Act 1890 and the partnership would be governed solely in accordance with that act. This could result in some key areas not being dealt with and there being no clear framework governing the relationship between partners. Overall, lacking a partnership agreement exposes partners to risks that can be mitigated through careful planning and documentation.
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Denise is a Member at Mullis & Peake and specialises in commercial and company work
