Why do you need a written partnership agreement?

If you have entered into or set up a business with someone else with a view to making a profit you most likely have a partnership in law, whether or not you have a contractual agreement in place. This is because of a fairly ancient piece of English legislation (the Partnership Act 1890 (PA 1890)) and much of this law will apply to a partnership by default unless the partners have agreed something else in writing. These default provisions are not always what you would expect.

Putting in place a properly prepared written partnership agreement is vital to ensure that your intentions and agreements about how the partnership will operate apply. Your intentions may not be accurately reflected in the default provisions under PA 1890. For example:

  1. When will the partnership start and end?
    • The actual start date of a partnership can be hard to determine, but may be important in considering the tax position, for example.
    • If you do not agree otherwise, the partnership may be dissolved at any time by any partner giving notice to the others and will automatically be dissolved by the death or bankruptcy of any partner.
  2. What contributions will each partner make and how will the profits/losses/liabilities be shared?
    • Under the PA 1890, partners are entitled to share equally in the capital and profits of the partnership and must pay equally towards losses, regardless of what they each contribute.
    • In addition, unless you agree otherwise, every partner is entitled to take part in the management of the partnership and no partner is entitled to remuneration for acting in the partnership business.
  3. How will decisions be made?
    • Under the PA 1890, ordinary matters connected with the partnership business are decided by a majority, whereas the consent of all the existing partners is needed to introduce a new partner or change the nature of the partnership business.
  4. What property belongs to the partnership and what belongs to individual partners?
    • If the partnership will be allowed to use property or assets which belongs to one of the partners personally, the terms of the occupation or use need to be clear to make sure that the property is not unintentionally treated as a partnership asset.
  5. What happens if one partner wants to leave (e.g. to retire or through ill health) or you wish to expel a partner?
    • Unless you expressly agree otherwise in writing, a partner cannot be expelled by a majority decision of the other partners.

Disputes often arise when there is no written agreement in place (meaning that the little known default provisions apply instead), or when the agreement is unclear or does not reflect what some or all the partners intended.

(This note does not cover Limited Liability Partnerships (LLPs), Limited Partnerships (LPs) or the taxation of partnerships generally).

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