Setting up a business partnership can be an exciting time. Working with other professionals can offer additional skills, and the ability to steer your company successfully with insight, support and guidance from others.
There is no legal requirement to have a written partnership agreement in the UK, but they can be a very helpful tool. If you don’t have one in place your partnership will be governed by the rules of the Partnership Act which was created in 1890.
What is a partnership agreement?
A partnership agreement allows you to create the terms which govern your business and partners. It includes:
- Roles and responsibilities – offering clarity on who does what to avoid misunderstandings.
- Profit and loss sharing – agreeing a split that reflects each partner’s contributions.
- Decision-making – helping guide how decisions are made, such as by majority vote or a unanimous consent
- Capital contribution – outlining initial investments and how any further capital will be contributed.
- Dispute resolution – setting out clear steps for resolving conflicts, to help avoid costly legal battles.
- Exit strategies – defining what happens if a partner wants to leave, retires, becomes incapacitated or dies, ensuring business continuity.
- Protection of assets – defining which assets belong to the partnership and which belong to individual partners.
- Confidentiality and non-compete clauses – protecting your business’s sensitive information and former partners from competing directly.
A specially drawn up agreement can also help with accurate tax reporting to HMRC, and with business loans; many banks will require a partnership agreement before lending money.
What happens without a partnership agreement?
Without a written partnership agreement, the default rules in the Partnership Act 1890 will apply. This old legislation might not be suitable for a modern business and can lead to issues, especially if disputes arise. For example, the Act dictates:
- Equal sharing of profits and losses
- Each partner is personally liable for all the partnership’s debts, not just their share. This means a creditor could pursue one partner for the entire amount, even if that partner only owns a small percentage of the business.
- No right to remuneration
- Unanimous consent for new partners
- No power to expel a partner
- Automatic dissolution on death, bankruptcy, or retirement meaning the partnership automatically dissolves if a partner dies, goes bankrupt, or even just gives notice to retire
- No clear ways to resolve disagreements
While not legally required in the UK, a partnership agreement is an essential document that offers clarity, certainty, and protection for all partners and the business itself.