What is a partnership agreement?
A partnership agreement is a written agreement between two or more individuals who join as partners to form and carry on a for-profit business. The Agreement will state the nature of the business, the capital contributed by each partner, each partner’s rights and responsibilities.
A partnership can either be set up as a traditional partnership or a limited liability partnership.
A traditional partnership does not have a separate legal existence like an incorporated firm, and the partners are jointly and severally liable for the debts of the company. Even on withdrawing from the partnership the partners remain liable for already incurred debts and even for future debts unless their departure is correctly documented.
The partners in a limited liability partnership aren’t personally liable for debts the business can’t pay. Their liability is limited to the amount of money they invest in the business.
Limited liability partnerships are most often set up by professional services firms, like solicitors or accountants.
Unlike a traditional partnership the duty of good faith is not implied into a limited liability partnership and so it is essential that a partnership agreement is entered into to govern the conduct of the partners towards each other.
Do I need a partnership agreement?
All partnerships require a partnership agreement, sometimes referred to as a ‘partnership deed’. A partnership agreement is required to allow the partnership to expel partners, to ensure that partners attend work and to control the distribution of profits.
What will happen if I do not have a partnership agreement?
Partnership agreements are essential. In the absence of a partnership agreement there is much potential for dispute and disagreement between the partners. Planning ahead avoids disputes and costly court battles later. No matter how much of a friend your potential partner is, you should never enter a business partnership with him or her without a formally drawn up partnership agreement.