Business Partnerships: What You Need to Know

What type of business do you operate as? Is it a partnership? If you and another person carry on a business in common with a view of making profit, then you may be operating as a traditional partnership and not have even known it!

That is one of the main benefits of running a business through a partnership, it is very easy to establish as absolutely no formalities are required. 

One of the fall backs however, is that if you don't have a partnership agreement in place, your business model is governed by a law that is over 125 years old. Yes, the Partnership Act 1890 is still considered good law and provides provisions for how your partnership should function. Even if you knowingly created a partnership to use as your business model, this article will still be of use to you as you may not have been aware the significant role the Partnership Act 1890 plays in the operation of your business, and how unsuitable these default provisions are to the modern business environment. 

The Partnership Act 1890 doesn't go as far as telling you how to run your business, but it does imply default provisions on the functioning of your business if you don't have a partnership agreement in place. This may sound like one less task you need to worry about, but these default provisions are not commercially favourable and can be detrimental to the existence of your business. For example, section 26 of the Partnership Act 1890 provides that if one partner leaves the partnership, whether by retirement or termination, then that partnership shall dissolve upon the partner leaving. This draconian default provision can be addressed and the detrimental affects prevented through an express provision in a partnership agreement, which will provide that the partnership shall continue even in the event a partner leaves the partnership.  

Listed below are a few more of the unfavourable provisions that the Partnership Act 1890 imposes on your business:

Profits (section 24(1)) - profits of the partnership are to split equally, regardless of involvement, input or financial contribution. This may seem agreeable when the partners consent to equal contributions however; the danger is there are no safety provisions to handle eventualities where partners don't live up to their word. It is sensible to include a profit sharing ratio or mechanism for determining profit distribution, to avoid future disputes and promote the interest of the successful continuation of the partnership. 

Salary. (section 24(6)) - partners are not entitled to a salary!

Property.  (section 20) - whether property belongs to the partnership or the individual partner will depend on intention. As this is subjective, it can be difficult to prove and therefore presents the potential for disputes among the partners. It is commercially and financially sensible to decide in the partnership agreement what is partnership property and what is not.

Who can bind the partnership? (section 5 and Common Law) - there are circumstances where a partner can bind the partnership against the will or knowledge of the other partner(s). A partner could for example, enter into a contract on behalf of the partnership which will be binding. This ability can extend to a person connected to the partnership, perhaps an employee or ex-partner, without the agreement of the partners.

Whether the partnership is bound in some circumstances will depend on the interpretation of the third party involved, so it will be completely out of the partners’ hands! You could find yourself bound by a contract you did not agree to or know about. If it ends up costing the partnership for reasons such as the deal being bad or risky, as your liability is unlimited it could have a detrimental affect on you beyond what you contributed to the partnership. It is therefore fundamental that provisions are included in the partnership agreement addressing who can make deals on behalf of the partnership, and a mechanism for granting permission to do so.

It is unlikely that I would advise any business to rely on all of the default provisions of the Partnership Act 1890. While a few of the default provisions may work for one business, depending on the intentions and instructions, collectively, they are not commercially sensible. I would recommend a partnership agreement to anyone who falls within the remit of the partnership definition, as the consequences of relying on the Partnership Act 1890 can be detrimental. 

A partnership agreement gives you the flexibility and control you need so your business functions how you want it to. Without one, you are facing profit distribution which is potentially unfair, and the possibility of your partnership dissolving upon the retirement of a partner, or dispute which may arise due to the impact of one of the other unfavourable provisions taking affect.

Martin Tolhurst Solicitors recognises the importance of your business functioning like a well oiled machine, which is why we offer partnership agreements that are tailored to your individual business to achieve your objectives. Get in touch with our team today to discuss things further on 01474 546013.