Many couples owning and running a business together do not see the need for formal documentation, but what happens if the relationship ends and a commercial dispute arises? A partnership is defined under the Partnership Act 1890 (Act) as “the relation which exists between persons carrying on a business in common with a view to profit”. This means that whether a partnership exists will be a matter of fact rather than a decision by the relevant parties.
A partnership agreement is a formal contract between the partners, which sets out the way in which the business will operate. There is no obligation to have such an agreement and in such circumstances, the partnership will be governed by the Act. However, many of the terms of the Act are considered to be outdated with modern day business practices and may not reflect the intention of the partners. This can lead to unwanted consequences for the partners should the terms of the Act need to be applied.
Important default provisions of the Act include:
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Profit and liabilities - all profits and liabilities are shared equally between the partners. This means that, for example, if one partner contributes significantly more capital to the business, commits more time to the business and has more authority in terms of the operation of the business than another partner, under the terms of the Act, they will take an equal share in the profits and be equally liable for the losses of the partnership;
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Management decisions - all partners are considered equal in regard to decision-making and decisions are made on a majority basis.In practice, this may not reflect the intention of the partners if, for example, voting should be proportionate to the entitlement to profits or capital contributions;
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Dissolving the partnership - any partner can bring a partnership to an end by serving notice to the other partners, at any time and with immediate effect; and
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Expulsion of a partner - there is no power for partners to expel a partner.
Having a partnership agreement can override any unwanted provisions of the Act and allow partners to put in place specific arrangements that are unique to their business. The agreement could set out, for example:
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bespoke provisions as to the sharing of profits and liabilities between the partners and how certain decisions are made;
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a prohibition on a partner from being able to give notice to bring the partnership to an end;
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a mechanism for expulsion of a partner in certain circumstances (e.g. if a partner becomes insolvent, neglects to perform his or her duties or breaches the partnership agreement);
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the duties and responsibilities of the partners and the time and effort that they will commit to the business on a day to day basis;
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how the partnership will be brought to an end; and
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a procedure for partners to retire from a partnership without involving a dissolution of the partnership.
It is ideal to put in place a partnership agreement at the beginning of the business relationship. However, a partnership agreement can be introduced at any point. If a business has been operating for a number of years without a formal agreement, this does not prevent one from being put in place and is advisable for couples to avoid later dispute.
Daniel Billson
Corporate Department