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 fulfil their agreed obligations 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.
Updating a partnership agreement
In some instances, it may have been a few years since you had a partnership agreement drawn up and legislation may have moved on. We can review your agreement and update it where required and advise you (in conjunction with your accountant) and the best legal structure for your business.
A definitive partnership or limited liability partnership agreement is vital to the smooth running of any business. It also facilitates business continuity in times of dispute.
Areas of specialism
- Partnership agreements/LLP formation
- Partnership/LLP conversions
- Departures & restructuring
- Disputes
- Acquisition & mergers & disposals of partnerships/LLPs
- Liquidation & insolvency of partnerships/LLPs
Do I need a solicitor for a partnership agreement?
While not legally required, it is strongly advisable to consult a solicitor for a partnership agreement. A solicitor can help draft a clear and legally sound agreement that protects your interests and minimises potential disputes, providing valuable legal expertise and peace of mind.
Who writes a partnership agreement?
A partnership agreement is typically written by the partners themselves with the assistance of a solicitor. It outlines the terms, responsibilities, and expectations of the partnership, covering aspects such as profit sharing, decision-making, and dispute resolution.
Rules when there is no partnership agreement
In the absence of a partnership agreement, the rules governing the partnership are generally governed by the Partnership Act 1890 (in the UK). Some key rules include:
- Equal profit-sharing: partners share profits and losses equally, regardless of their capital contributions or efforts
- Equal management: each partner has an equal say in the management of the partnership, unless otherwise agreed
- No interest on capital: partners do not receive interest on their capital contributions
- No salary or interest on loans: partners are not entitled to a salary or interest on loans to the partnership
- Joint and several liability: partners are jointly and severally liable for the partnership's debts and obligations
- No right to compete: partners cannot engage in a competing business while still part of the partnership
It's crucial to consult with our partnership agreement solicitors to understand how these default rules may apply to your specific situation and to consider creating a custom partnership agreement to tailor the arrangement to your needs.
FAQ's
What are the possible outcomes if partners are in conflict?
A well-structured partnership agreement typically includes a dispute resolution mechanism, which can ultimately lead to one or more partners buying out the others. Given that partners bear personal liability within the partnership, significant conflicts can be difficult to resolve without damaging the business. Consequently, it is advisable to have a clear exit strategy that allows partners to separate cleanly when irreconcilable differences arise.
In situations where no formal agreement exists, the Partnership Act 1890 provides the default legal framework. However, this legislation offers minimal support for resolving disputes, often forcing partners to resort to dissolving the partnership as the only option. Although dissolution is usually seen as a last resort, the mere possibility can prompt partners to negotiate in good faith to avoid such an outcome.
How do traditional partnerships differ from limited liability partnerships (LLPs)?
In a standard partnership, each partner shares personal responsibility for the business’s operations and liabilities. To manage this exposure, it's important that adequate insurance is in place to protect against potential claims or debts.
By contrast, a Limited Liability Partnership (LLP) offers a structure that limits personal risk. It functions as a separate legal entity, meaning that liability generally rests with the LLP itself rather than its members. As such, contracts with clients, suppliers, and other third parties are made in the LLP’s name, helping to shield individual members from direct legal and financial responsibility.
What rights and protections do partners and LLP members have under the law?
In a general partnership, each partner bears personal responsibility for the financial and legal obligations of the business. This means that if the business incurs debts or liabilities, the partners may be personally liable. As such, it is crucial that appropriate insurance cover is in place to protect against potential claims.
Partners typically fulfil dual roles as both business owners and operational managers. While some partners may contribute capital and take on the title of equity partners, and others may operate more like senior employees without a financial stake (non-equity partners), the law does not distinguish between them when it comes to liability to third parties—they are all equally responsible.
Given the nature of this liability and the need for clarity in rights and obligations, a formal partnership agreement is highly recommended. Without one, the default rules under the Partnership Act 1890 will apply. However, many of its provisions are outdated and may not reflect the expectations or practicalities of modern-day businesses.
A LLP on the other hand, combines the flexibility of a partnership with the benefit of limited liability usually seen in companies. In an LLP, members are not personally liable for the debts or obligations of the LLP itself, as it is a separate legal entity capable of entering into contracts and owning assets in its own right.
Designated Members in an LLP take on specific responsibilities, including ensuring compliance with statutory obligations. To avoid relying on the default provisions of the LLP legislation, it is good practice to formalise the arrangement between members in a Members’ Agreement.
Whether operating as a general partnership or an LLP, a bespoke, written agreement tailored to the specific needs and structure of the business provides clarity, reduces the risk of internal disputes, and ensures smoother day-to-day management.
Can a partnership be formally ended or dissolved?
There are five key legal methods to dissolve a partnership:
1. Dissolution by mutual agreement
2. Dissolution via notice
3. Dissolution upon expiration of a set term
4. Dissolution triggered by a partner’s death or insolvency
5. Dissolution ordered by the court
Dissolution by mutual agreement
Partnership agreements usually include procedures for partners to agree on ending the partnership. This often requires unanimous consent unless otherwise stated. If any partner withdraws their agreement, the partnership cannot be ended through mutual consent alone.
Dissolution by notice
In the case of partnerships “at will” (those without a fixed term), any partner can dissolve the partnership by giving notice to the others. However, partnerships with formal agreements or those established as limited liability entities are generally not “at will.” In such cases, the departure of one partner does not automatically end the partnership, which can continue with the remaining partners.
Dissolution by expiry
Partnerships set up for a specific duration or purpose will naturally dissolve once that period ends or the objective is achieved, as outlined in the partnership agreement. Limited companies and LLPs, by contrast, do not have set terms and require formal procedures, such as removal from the Companies House register, to be dissolved.
Dissolution due to death or bankruptcy
Typically, the death or bankruptcy of a partner results in the partnership ending, unless there is a written agreement that provides for its continuation. Without such provisions, the default legal framework can complicate the process. Limited companies and LLPs remain legally intact regardless of changes in membership due to death or insolvency.
Dissolution by court order
If partners cannot reach an agreement to dissolve the partnership, the court may be petitioned to do so when it is deemed fair and reasonable. Grounds for court-ordered dissolution might include irreparable disputes, ongoing financial losses, a partner’s incapacity or misconduct affecting the business, repeated breaches of the partnership terms, or actions that make continuing the partnership unreasonable.
Which laws and regulations apply to Limited Liability Partnerships in the UK?
The Limited Liability Partnership Act 2000 (LLP Act) serves as the core legislation regulating LLPs. Complementing this Act are several key regulations, such as the Limited Liability Partnership Regulations 2001, the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009, and the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008, which provide additional legal details and requirements.
However, relying solely on these statutory provisions is not recommended. It is considered best practice to establish a detailed members’ agreement to clearly outline the rights, duties, and governance of the LLP beyond what is set out in the legislation.
Should a partnership agreement include restrictive covenants?
Yes, the agreement should definitely include restrictive covenants.
When a partner leaves, they take with them valuable insights and relationships with clients, staff, and suppliers that are crucial to the partnership. To protect the business, restrictive covenants and confidentiality agreements are included to prevent former partners from using sensitive information, poaching customers or employees, or interfering with supplier relationships. Without clear and well-drafted provisions in the partnership agreement, it is very challenging to prevent ex-partners from taking actions that could harm the partnership’s business.
What clauses are typically found in an LLP agreement?
In LLP agreement serves as a formal contract between all members, outlining the commercial relationship and setting clear rules for how the LLP operates.
Key elements typically included are:
- The management framework and voting rights, specifying how decisions are made, the weight of each member’s vote, and whether certain matters require unanimous or majority consent.
- Procedures for bringing in new members, as well as handling members who choose to leave or are removed.
- The specific rights and duties assigned to each member.
- Regulations governing members’ capital contributions and investments.
- Guidelines on ownership, use, and control of company assets.
- The approach to dividing profits and sharing losses among members.
- Overall governance structure of the LLP.
- The decision-making process for critical issues affecting the LLP.
Who can set up an LLP, and what are the legal requirements?
An LLP must be formed by two or more people who agree to run a lawful business with the intention of making a profit, and they must sign the incorporation documents.
To officially register the LLP, the designated form (LLIN01) must be submitted to Companies House, accompanied by the relevant fee. This can be done electronically or by mailing paper forms.
