What is a partnership agreement?
A written document between two or more business partners which sets out the rules as to how the internal business of the partnership is to be conducted.
Why is a partnership agreement so important for my business?
Without a partnership agreement addressing key issues, your partnership will automatically be governed by the Partnership Act 1890. Here are some examples of what that Act provides:
- All property brought into the partnership is deemed to belong to the partnership;
- All partners can be involved in management of the business and, with a few exceptions, all day-to-day matters are dealt with by majority;
- A partner can give notice to dissolve the partnership at any time – no minimum period applies;
- A partner can only be removed from the partnership, even if their conduct is damaging to the business, ‘by express agreement between partners’, including the wrongdoing partner;
- The retirement, death or bankruptcy of any partner dissolves the partnership;
- A departing partner’s capital in the business is an immediate debt to be paid by the partnership;
- There are no restrictions preventing departing partners doing business with existing clients, enticing away employees or otherwise competing with the partnership;
- Goodwill and its potential value is not mentioned in the Act, another possible cause of dispute.
What can a partnership agreement address that the Partnership Act 1890 does not?
If any of these consequences could be problematic for you or your business, a partnership agreement can cover the position. It can also deal with other practical issues not covered by the Act such how profits are shared, the partners’ expectations of hours to be worked, holidays, sickness leave and payments, etc.
These issues are best addressed at the outset or at least when all partners get along together. A well drafted agreement will help to avoid the time, expense and acrimony involved in any dispute caused by uncertainty over these issues.
This document is for general information only and is not intended to provide legal advice. Dixon Ward accepts no liability in connection with any loss suffered as a result of reliance on the information contained in this Factsheet. If you require further legal advice, please get in touch with one of our specialist lawyers.
