Why does my business need a partnership agreement?

by Tim Bishop on July 18, 2013

  • SumoMe

All friends together?

Can you rely on mutual professional respect and even long term friendships to keep a business partnership on track and avoid the venture becoming mired in a spiral of confusion, disagreements and disintegrating relationships? It is certainly tempting to do so when, compared to setting up a limited company, the establishments of a business partnership is on the face of it, the easiest thing in the world to accomplish. Creating your partnership won’t require special documentation, an initial fee or the annual filing of accounts. The lack of hassle sounds heavenly doesn’t it?

Hindsight is a wonderful thing

Now, look a year or two down the line. Things went pretty well to start with didn’t they? You all muddled along together very nicely and the business had legs. Then came some tricky decisions to be made and try as you might you just couldn’t get majority agreement from your partners and golden opportunities were missed. Bad feelings began to arise from the frustration and anguish and fingers were pointed. Such and such a partner wasn’t pulling her weight; no one knew who had overall responsibility for the annual accounts; the default equal profit share was beginning to look very unfair to the partners with the largest stake holdings, and so on and so forth. Finally a disgruntled partner decided to up and leave and with no agreed arrangement in place to buy out his holding, the partnership abruptly collapsed. Things aren’t so heavenly now.

The need for a written partnership agreement

The plain fact of the matter is that by having an experienced solicitor set up a formal partnership agreement at the very outset, the vast majority of partnerships are able to effectively resolve or avoid problems and pitfalls down the line. Such an agreement will specify the structure of the relationships between the partners and such a specialist partnership agreement solicitor will taken great pains to familiarise themselves with the partners and their business and to draw up a bespoke agreement that, in addition to dealing with commonly arising issues, will address issues specific to the particular business.

At the very least such an agreement will cover the following:

• The name of the partnership.

• The place of business.

• Definitions used in the agreement.

• Procedure for the amending the agreement.

• The duties of each partner.

• Restrictions on the authority of partners.

• Procedure for making decisions.

• The allocation of profits and losses.

• Financial responsibilities of the partners, including:

  •  profits and losses
  •  banking
  •  capital
  •  insurance
  •  annual accounts
  •  drawings

• Dispute resolution.

• Loss of a partner due to death, retirement or expulsion from the partnership.

• Admittance of new partners.

• Buying up by on-going partners of the departed partner’s share of the partnership.

Partnership –  the foundation that endures

New partnerships can grow and develop rapidly, commonly throwing up predictable and less foreseeable issues sooner or later, including a rapidly changing assets and liabilities situation. The sooner a comprehensive, bespoke partnership agreement is in place the sooner the partners are able to focus on their business instead of having to start bailing out the sinking boat that is their hastily or inexpertly formed partnership. Ideally your specialist partnership agreement solicitor should draw up the agreement before the partnership starts or else as soon after as possible.

Tim Bishop is senior partner of Bonallack and Bishop – Andover and Salisbury Solicitors specialising in partnership law and business law in general. For more information about partnership law and partnership disputes, call them on Salisbury [01722] 422300 or visit their specialist website at http://ww2.partnership-dispute.co.uk

 

Tim Bishop
Having qualified as a Solicitor in 1986, Tim Bishop is a legal entrepreneur who owns law firm Bonallack & Bishop. Find out why you should choose the commercial solicitors at Bonallack & Bishop: Visit www.bishopslaw.co.uk.
Tim Bishop

Previous post:

Next post: