Partnership agreements

Published: 11th May 2010
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Contents: What is partnership?

Who makes the rules?

Keep it Simple;

Do not get stuck in the swamp;

How do I terminate my partnership agreement?


What is partnership? The word partnership, both formally and informally, means a situation where two or more people are working together for a common purpose, and with the intention of making money;

Partnership can regulate a situation where two people work closely together on a daily basis, like a family plumbing firm, or a situation where individuals work quite separately, but have the benefit of shared support services, such as a firm of solicitors;

A partnership is not a legal "person". It is just a framework for two or more people to work together. Employees of a partnership are, in law, the employees of the partners;

Unless the partnership agreement states otherwise, all partners are equal. They share profits and losses equally;

All partners are liable for partnership debts. That means that if one partner makes a contract in the course of the partnership business, and the contract goes wrong, then all the partners could end up bankrupt, with all of their personal assets taken in order to pay off the partnership debt. Conversely, if one of the partners becomes bankrupt in his personal affairs, his creditors will be entitled to take his share in the assets of the partnership, but the assets of the remaining partners will be unaffected. This is of course just one good reason to use a formal agreement, which makes sure that a bankrupt partner (and of course his creditors) has as little a financial interest as possible.

Still on the subject of bankruptcy, neither a trustee nor any creditor can automatically become a partner under any circumstances. The worst case (with no partnership agreement) is that they could force a sale of the partnership assets to raise enough cash to pay out the bankrupt partners share. In fact the most likely outcome, even in such dire circumstances is that the trustee is persuaded to accept a sum the small size of which actually provides a windfall gain to the remaining partners: Decision making - a partnership requires no formal decision making structure. You can set out whatever arrangements you like in the partnership agreement, so that different partners, or groups of partners, are given power and responsibility for different sections of the partnership business. Perhaps more importantly, other partners may be excluded from those partnership decisions;

Because a partnership is governed by the partnership agreement (or by the Partnership Act 1890), the structure you agree has to cover all eventualities, such as who owns the partnership premises; how new partners are to be taken in, and how they are to be paid; retirement of partners; circumstances in which a partner may be removed from the partnership;

Informal partnerships - very many people work in an informal partnership of two, with no formal partnership agreement. For example, Smith & Jones may be architects or plumbers or run a corner shop. At the end of each year their accountant will draw up partnership accounts, upon which each will pay his own tax. Because no great value builds up in the partnership business, there is nothing obvious to argue about. If the partners have a disagreement each can go his separate way without too much loss or stress. Unfortunately, that is often a misunderstanding. A "modern" problem with even quite a simple partnership is intellectual property.

Any trading business soon accumulates value in it's: Work-in-progress;

Customer list;

Business address (because customers know where to come);

Service record;

Business name;

Domain names;

Web site.

These partnership assets may not be of value to third parties, but they are of considerable value to either partner when a dispute looms. (The Bank is aware of this, so they always seek a "fixed and floating" charge, which covers everything except the spouse and dog!) The best way to provide for dissolution and dispute is to sign a carefully planned partnership agreement: Unless the partnership agreement states otherwise, a partnership is dissolved by one partner giving notice to the others of his intention to dissolve the partnership, OR automatically, by the death or bankruptcy of one partner. That is most unlikely to be convenient. Again, the best way to avoid problems is to consider and sign a partnership agreement;

Finally, a word about limited partnership and limited liability partnerships. A limited partnership is set up under the light hand of the Limited Partnerships Act 1907. It is a partnership between two or more people or companies where one party (the limited partner) is not liable beyond his partnership capital. This is the opposite of the usual full liability arrangement. This is a simple and little used device. For example, a limited partnership could be set up between Susan Jones and the company she controls, SJ Ltd. Susan could be the limited partner, leaving the company with the unlimited liability. Provided the company had no assets of real value, Susan and her assets would be safe in the event of failure of the business conducted by the partnership - whatever it was. The use of a limited partnership is currently under review by the DTI. We have another free information page on the subject of limited partnerships. Viggie - Link to Info Page 361 Net Lawman offers a limited partnership agreement and will be happy to draft any changes you might require;

The limited liability partnership is a new animal. It is a creature of statute, born of the Limited Partnerships Act 1990. It has enabled partners in many large traditional professional partnerships to avoid full personal liability for the debts of the partnership. Although this is a form of partnership, it achieves little that cannot be achieved more simply through a limited company for most businesses. The formation of a limited partnership requires both a partnership agreement and the completion of statutory forms supplied by Companies House. We have another free information page on the subject of limited liability partnerships. Net Lawman offers a limited liability partnership agreement and will be happy to draft any changes you might require.

Who makes the rules?
Partnership is an area of law comparatively unregulated by the state, so what goes into your partnership agreement is up to you. There are particular rules as to partnership taxation, but almost all other arrangements are up for grabs. If the partners do not sign a partnership agreement which effectively covers the points made in the Partnership Act 1890, then the act applies to that extent. In particular, if there is no written partnership agreement and one partner decides to break free, he can insist on the partnership assets going under the hammer! That is usually disastrous for the business still operated by the remaining partners! Your partnership agreement should include provisions for: who owns the partnership premises; how new partners are to be taken in, how partners are to be paid, retirement of partners, expenses, management of the business, matters relating to partnership capital and other money, and circumstances in which a partner may be removed from the partnership;

Decision making - a partnership requires no formal decision making structure. You can set out whatever arrangements you like in the partnership agreement, so that different partners, or groups of partners, are given power and responsibility for different sections of the partnership business. Perhaps more importantly, other partners may be excluded from those partnership decisions;

There are particular rules as to partnership taxation (see separate free information page) ,but almost all other arrangements are up for grabs.

Keep it Simple
Informal partnerships - very many people work in an informal partnership of two or three, with no formal partnership agreement. For example, Smith & Jones may be architects or plumbers or run a corner shop. At the end of each year their accountant will draw up partnership accounts, upon which each will pay his own tax. Because no great value builds up in the partnership business, there is nothing obvious to argue about. If the partners have a disagreement each can go his separate way without too much loss or stress. Unfortunately, that can be disastrous. Every partnership ends some day. Most end sooner than the partners might have hoped when they started to work together. The best way to stay friends is to have everything agreed at the beginning. That means having a proper partnership agreement.Will your business accumulate value in its Work-in-progress;

Customer list and reputation;

Business address;

Business name;

Domain names;

Web site;

Specially developed software.

You cannot physically carry these assets away. They are "intellectual property". These partnership assets may not be of value to third parties, but they are of considerable value to either partner when a dispute looms. (The Bank is aware of this, so they always seek a "fixed and floating" charge, which covers everything except the spouse and dog!) The best way to provide for dissolution and dispute is to sign a carefully planned partnership agreement.Unless the partnership agreement states otherwise, a partnership is dissolved by one partner giving notice to the others of his intention to dissolve the partnership, OR automatically, by the death or bankruptcy of one partner. That is most unlikely to be convenient. Again, the best way to avoid problems is to consider and sign a partnership agreement.

Do not get stuck in the swamp

Informal partnerships - very many people work in an informal partnership of two or three, with no formal partnership agreement. For example, Smith & Jones may be architects or plumbers or run a corner shop. At the end of each year their accountant will draw up partnership accounts, upon which each will pay his own tax;

Because no great value builds up in the partnership business, there is nothing obvious to argue about. If the partners have a disagreement each can go his separate way without too much loss or stress. Unfortunately, that can be disastrous;

Every partnership ends some day. Most end sooner than the partners might have hoped when they started to work together;

The best way to stay friends is to have everything agreed at the beginning. That means having a proper partnership agreement;

Will your business accumulate value in its;

Work-in-progress;

Customer list and reputation;

Business address;

Business name;

Domain names;

Web site;

Specially developed software?

You cannot physically carry these assets away. They are "intellectual property". These partnership assets may not be of value to third parties, but they are of considerable value to either partner when a dispute looms. (The Bank is aware of this, so they always seek a "fixed and floating" charge, which covers everything except the spouse and dog!) The best way to provide for dissolution and dispute is to sign a carefully planned partnership agreement unless the partnership agreement states otherwise, a partnership is dissolved by one partner giving notice to the others of his intention to dissolve the partnership, OR automatically, by the death or bankruptcy of one partner. That is most unlikely to be convenient. Again, the best way to avoid problems is to consider and sign a partnership agreement.


How do I terminate my partnership agreement?
First, stay "friends" as far as possible. You have to negotiate your way out if you want the best deal. Remember:

You are liable to the bank and other creditors, as a partner, until the partnership is dissolved. (You will still be liable for old debts after it is dissolved);

You have a high duty of care to your partner. The courts will not approve of bully boy tactics;

It is likely that intellectual property may be of considerable value to a partner, but be worth peanuts if sold by auction;

If possible, do not walk away. You may be in breach of the partnership agreement or of the duty of care imposed by the Act.

For more information, visit us at http://www.netlawman.co.uk


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