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SETTING UP A PARTNERSHIP & THE IMPORTANCE OF A

FORMAL AGREEMENT
SETTING UP A PARTNERSHIP & THE IMPORTANCE OF A FORMAL
AGREEMENT

Its quite common to start up a business with a partner, but it is always advisable to draw up a formal partnership agreement in the
rst instance to safeguard against any future complications further down the line. Hannah Newell from our Legal Document Partner,
Lawbite describes why written agreementsare so important when starting a new partnership.

Partnerships are a key part of any business and a vital consideration for those just setting out. You will need to think about how you will build
solid and productive relationships with your clients, your suppliers and your regulators to name but a few. But it can be the key partnership that
underlies your new business, the relationship with those with whom you have started this venture, that might cause you the biggest problem
down the line as your business expands, diversi es and gets more successful. It is really important to understand the legal status of your
business partnership from the outset and lay down some ground rules to protect everyones interests.
What is a partnership?
Far from being a complex legal entity, the most basic of partnerships in English law arises automatically under the 1890 Partnership Act and its
default provisions are provided for within that Act. So make no mistake, if you are carrying on a business in common with a view of pro t,
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whether you have signed anything or not, you have a partnership and you are bound by the Act. Great you might think; no need for lawyers or
expensive agreement drafting, the law lays it all out for me. So in the absence of any written partnership agreement, what is your position?
The Partnership Act 1890
The key terms of the Partnership Act which would apply to you without a written partnership agreement cover the following;
Two or more people can operate a partnership simply by doing business together. Each partner is potentially liable for all the debts of the
business, regardless of for example the level of your investment, level of activity or any assignation of fault. In the same vein, all pro ts are shared
equally which includes interest on capital that has been contributed, regardless of its source. Every partner must agree to the introduction of a
new partner but if any partner wants to leave, even if everyone agrees, the partnership must be dissolved. The same principle applies if a partner
dies or goes bankrupt, the partnership is automatically dissolved. There is no provision within the Act for restrictive covenants on outgoing
partners so you could suddenly nd yourself with an unfettered competitor. Similarly there is no provision for recognising goodwill that a
particular partner may have built up when they retire, leave or die.
Overall, running a business as a partnership without a formal partnership agreement is likely to be a very unsatisfactory state of a airs. So what
are the provisions you should include in your formal agreement, to avoid the di culties likely to arise without one or worse still, the sudden
collapse of your new business?
Key Provisions in a Formal Agreement
The best way to protect your interests and that of your new business is to have everything laid out in a formal written agreement from the outset.
These are the key provisions to consider;
You should include clauses in your agreement that re ect the contributions of your partners either in terms of capital investment, skills involved,
day to day management and so on, in the pro t sharing arrangements. Consider how losses of the business will be shared and any rules for
taking money out of the business that you want to be explicit about. What will happen if a partner wants to leave? You can ensure the partnership
is not automatically dissolved with a formal agreement, in addition to covering notice periods, pay outs, withdrawal of capital investment,
restrictive covenants and liability for any losses. You can also cover what happens when you want a partner to leave in the unfortunate
circumstances that they are not performing or have in some way committed serious misconduct. It can be handy to have a dispute resolution
clause as well as tailor made provisions for the general management of your particular business.
Protect your new business and yourself with a formal agreement
Without a formal partnership agreement, your new business, original and full of promise is vulnerable to dissolution and rife for potential dispute.
The formal agreement is a practical framework that can be tailored to your needs, providing the clarity you need to operate and grow your
business. Consider the terms carefully and in close discussion with your partners but remember that the drafting is exible. Even a simple
agreement covering the essentials will oil the wheels of business growth and harmonious partner relationships.

Hannah Newell, Corporate and Commercial LawBrief for LawBite

If you need any advice on legal documents a ecting your business, get in touch with Lawbite.

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