Partnership agreements

What is a partnership agreement?

A partnership agreement (also known as business partnership agreement and partnership contract) is a legal document used when two or more people enter into formal arrangement to manage and operate a partnership business with the aim make profits.

The partnership agreement sets out the key details that relate to operating the business partnership such as, amongst others, identifying the partners, initial capital contribution by partners, sharing profits and losses, each partner's share, decision making, further capital contribution, and dissolution of the partnership.

The purpose of the partnership agreement is to provide a business structure that regulates all aspects of operation of the business partnership and to provide a framework that regulates the relationship that exist between each individual partner.

What matters are the arrangements, not the business sector

A partnership agreement is all about the structure and management of a business. It does not matter what industry the partners work in. They could be professionals, like accountants or architects, they could be tradespeople like retailers or home extension experts, they could be family members working together such as on a farm, or they could operate a more unusual business in property or finance or international trade.

Furthermore, your business as partners could be a single specific project, such as a technology development project, and does not necessarily have to be commercial in nature.

Partnerships are quite distinct from companies in many areas, so the issues you need to cover in your agreement can be quite different to those that owners of a company might consider.

Avoiding the 1890 Partnership Act

The law relating to partnerships is over 100 years old. It provides default positions if you have no partnership agreement or if your business partnership agreement fails to cover an issue in contention.

Common issues with informal business partnerships

The problem is that, for the modern business, those default positions are unlikely to be what you want. In particular, you are likely neither to want equal ownership and liability with other partners, nor the default method for ending the partnership.

Unless your agreement states otherwise, all the partners have equal rights to take on contracts and equal responsibility to fulfil them. Profits and losses are also shared equally.

Commonly in partnerships, disagreements occur over contributions to the business and how profit and assets should be divided. In the real world, partners do not contribute equally.

The solution is to use a written partnership agreement

You should use a comprehensive written agreement to override these default positions. Your business partnership agreement should set out how skills, initial funding, different working hours and “assets” such as customer contact lists are valued, because different people place very different values on them. If you work for six days a week but your partner only works for two, you will want to make sure you are rewarded for your additional effort.

Liability is also joint and equal. Without a partnership agreement stating otherwise, a partner could make a contract in the course of partnership business that carries high risk. If that contract goes wrong, he or she, and all the other partners are liable for partnership debts equally. A partner in a business that isn’t regulated by a partnership agreement can find himself or herself in a position of personal bankruptcy as a result of a bad decision made by someone else, and about which the partner wasn’t made aware.

The other default position of the 1890 Act to avoid relates the ending of the partnership – the dissolution. The Act provides only one way to handle a partnership split or break. That is to put everything under the hammer at auction, leaving the partners to buy or not, as they choose. In our regulated society and business environment, that outdated provision can cause huge problems. The only way to avoid it is to have a modern partnership agreement which provides a proper exit route.

However, there is far more to a Net Lawman partnership agreement than just overriding these defaults. Each of these partnership agreement template provides a large framework for a modern partnership with many options, and extensive notes that guide you carefully through, paragraph by paragraph.

Why a short agreement is unlikely to be suitable for you

Other partnership agreements on the Internet, particularly ‘short’ versions, might cover the basics to form a partnership, but they aren’t likely to protect your interest in your new business sufficiently. Far more issues are considered in our documents than in any other partnership agreement template we have seen.

For example, the Net Lawman partnership agreement templates provide a set of easy to edit paragraphs covering intellectual property protection in depth. Most businesses have valuable IP, whether know-how or designs, but few partnership agreement templates address intellectual property, whether recognising who brings it into partnership, or who has the right to use it during and once the partnership ends. We help you to identify and protect ownership of valuable intellectual property and other assets that belong to just one partner.

What should a partnership agreement cover?

The short answer is that a business partnership agreement should cover everything of importance. Otherwise, you will be stuck with the default positions under the Partnership Act.

The point of having a partnership agreement is that you will have a detailed document that governs every aspect of management and operation of the business partnership. So for a partnership agreement to do its job, it must be a comprehensive document.

Some important provision a modern business partnership need in their business partnership agreement include:

• how new partners are taken in
• how assets and capital brought into the business partnership (specifically property and cash) are owned
• how profits and losses are shared
• how a partner can be removed from the business partnership (for example, if they are involved in a malicious or criminal act or committ a material breach of the partnership agreement or of their fiduciary duties) and the process for doing so (for example, through a written notice)
• how decisions concerning the business partnership will be made (a proper procedure for authority and voting
• how further captial contributions will be made
• how dissolution of the partnership will occur
• procedures when a partner dies

Should you use a partner agreement for your family business?

The importance of having a written partnership agreement is not diminished if a husband or wife or family members are running a business together.

While, a family business partnership agreement does not have to be as formal as a general partnership agreement where the all the partners not personally known to you. You still need to have a partnership agreement.

Informal partnerships can present come serious concerns for family businesses. For example, in the absence of a partnership agreement, the default rule regarding ownership will apply that assume that the business is owned equally by all the partners. This may not be the arrangement you would prefer to have. While equal partnership in a family business may seen natural, it can get very tough to resolve a dispute if all the partners are adamant on their position.

Who should use these agreements

The purpose of a partnership agreement is to set out the arrangements between the parties about how they will work, in much the same way as a shareholders’ agreement does for a company. So these templates have a wide range of uses.

• They are ideal for partnerships with between two and ten partners.
• Ownership of partnership assets and share of income and expenses does not have to be in equal proportions. Your sharing ratio could be 50:50, but it could also be 60:40, 70:30 or any other.
• These agreements can be used if one or more of the partners is 'sleeping' or 'silent', i.e. contributes money, experience or assets but does not take part in the day to day running of the business.
• Whilst partners are likely to be human individuals, these agreements can be used where one or more is a company or a not-for-profit organisation.

What these partnership agreement templates contain

You need a partnership agreement to record all the points agreed about what exactly is the partnership business; how you will manage it; who may take out what money, and much more.

These are professionally drawn, comprehensive documents designed to protect and help you. As well as giving you a legal structure, they contain extensive commercial and practical provisions that will help you manage your business and inter-partner relationships.

Despite the completeness and thoroughness of these documents, editing is easy. They are written in plain English, without legal jargon or complicated paragraph referencing so that you can simply and easily delete what you don't need.

Just a few of the provisions covered include:

• loans to the partnership
• banking arrangements
• records and accounts
• meetings and voting
• holidays and absence
• cars
• insurance
• good faith
• partnership policies
• restrictions on partners
• intellectual property
• confidentiality
• no competition
• expulsion
• termination of the partnership
• after termination
• indemnity for the partnership
• publicity and announcements

Limited liability partnerships

Two of these partnership agreements are LLP agreements. One covers a situation where all the partners work in the business and the other deals with working partners and “silent” partners. The latter are usually financiers or investors.

These partnership agreements provide for the differences in the legal structure of LLPs, and also set down a management regimen which is slightly stricter than that for a general partnership. You could say it was a step closer to the management of a limited company.

These too, are comprehensive partnership agreement templates with many options. For example, if your business is in science, technology or creative work, you will appreciate the very full provisions for management and protection of established and new intellectual property rights, new inventions, and derived products.

The limited partnership agreements also cover:

• basic provisions and legal requirements for an LLP
• partnership shares and variations
• partnership property, capital and shares
• loans to the partnership
• duties of designated partners
• actions for which partnership consent is required
• management and partner control issues
• intellectual property protection options
• confidentiality
• restrictions on partners
• retirement, death or expulsion
• termination of the partnership
• information required by the Registrar

Limited partnerships

This document concerns a partnership “animal” which has been quietly active for over 100 years, often used for tax reasons or for limiting liability.

The Limited Partnerships Act 1907 enables you to set up a trading vehicle where only one partner can be liable if things go wrong. Unlike the modern LLP, no registration is required and no special rules apply. So far as it is regulated, the Partnership Act 1890 applies, as it does to any ordinary partnership.