A partnership is essentially a business run by two or more people with a view to making a profit. Unlike an incorporated company it is very simple to set up. In fact a partnership can be formed by an oral agreement between the parties without any paperwork involved. Indeed, many people do not realise that by going into business with someone else they are effectively setting up a partnership automatically. Unfortunately, it is a fact of life that people will have disagreements and some will eventually fall out.
If a partnership comes into being without a formal partnership agreement having been drawn up then any dispute between the partners will be dealt with under the Partnership Act 1890. However, the Act is not a detailed piece of legislation and only covers the bare essentials of a partnership. For example, there is no provision for removing an errant partner. This means that in the event the partners have irreconcilable differences, the partnership would have to be dissolved.
Any dissolution of a partnership is likely to be very disruptive; the partners have to deal with the repayment of partnership debt as well as face the potential of a protracted dispute amongst themselves on any number of issues.
By contrast, a properly drawn up partnership agreement would specify what should occur in certain scenarios and what is expected of each partner within the partnership. For example, if a partner was to leave the partnership agreement could stipulate the circumstances in which his capital could be withdrawn and how his share of the partnership debt should be repaid as well as determining what are personal and what are partnership assets. It could also address the introduction of new partners to replace departing ones.
Just as importantly, to avoid dissolution, a partnership agreement will normally set out the circumstances in which a partner can be removed and include a mechanism for what should happen to his share of partnership assets and the payment of partnership debts if that happens. There could also be provisions which allow a partner to be bought out by the remaining partners with a detailed mechanism for valuing the outgoing partner’s share of the partnership.
Properly drafted partnership agreements can prevent disputes from arising as they will detail the rights and obligations of the partners. Where disagreements do arise a partnership agreement can provide a mechanism to resolve those disputes and therefore provide a clear framework for resolving any issues that arise between the partners. The time and expense incurred in having a formal partnership agreement prepared will far outweigh the time, cost and stress of dealing with a dispute without such an agreement.
At Blacks, we can prepare partnership agreements for all types of businesses or in the event of a dispute we can assist you with the resolution of that dispute. Please contact Luke Patel on 0113 227 9316 or email him at “LPatel@LawBlacks.com”.