If you run your business as a partnership you will need a written partnership agreement in place to ensure that your place in the partnership is defined.
If you run your business as a partnership you will need a written partnership agreement in place to ensure that your place in the partnership means what you expect in relation at least to the following key issues:
- How big is each partner’s share of the business?
- What share of profits will each partner receive?
- How much will each partner contribute to pay partnership debts?
- Will the working partners treated differently than non-working investor partners?
- How will disputes be resolved?
- How will new investors/new talent be integrated into the partnership?
- How can a partner leave the business?
- When can a partner be forced out of the business?
- How much influence does each partner have on business decisions?
- Can a departing partner take their share of the assets?
- What will happen if a partner is ill for a prolonged period?
- What will happen if a partner dies?
Ideally all of the partners will have similar expectations, and concluding a Partnership Agreement allows the partners to manage their business in a way which accurately reflects these expectations, the sector the business trades in, the partners’ shared values and aspirations and the business and financial dynamics between them.
Without an agreement that you have worked out with your partners the legal position on these and other issues will be decided by reference to the Partnership Act 1890, which provides some “default” terms for a partnership. Given the age of this legislation and the changes in business life since it came in to force, it is not surprising that it is unlikely to reflect the expectation of business partners in the 21st Century. For instance during the set up phase before trading actually starts there is no partnership in place. This would probably worry any partner investing significant time and or cash or intellectual property into the startup phase of the business.
In most businesses partners contribute in different proportions and in different ways to the partnership (some having more cash/ talent/ intellectual property to invest than the others). BUT unless they have an agreement, they will each be entitled to simple equal shares of the assets, profits and will be obliged to contribute equally to the losses. The major contributors would consider this an unfair split of profits and the minority shareholders would probably be concerned to face a larger than they expected share of any losses.
We work with our clients to avoid unintended consequences like these, so if you are already working as a partnership or are considering joining a partnership we can advise you and prepare a Partnership Agreement to reflect the realities of your business.
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