Spaghetti western allusions aside, a partnership is a relationship which subsists between persons carrying on a business in common with a view of making profit.
In the UK we commonly see general partnerships and limited liability partnerships as business structures (there are others, but we won’t discuss them here). The former is a partnership which does not create separate legal personality – it is a relationship between the partners who are jointly liable with the other partners for the debts and obligations that the partnership incurs. These are personal liabilities and are potentially unlimited. The latter is a body corporate which does create legal personality separate from its members (its partners), thus providing a level of protection against personal liability for its participants.
From a legal perspective one isn’t at all required to have a written partnership agreement for either a general partnership nor an LLP, but having one tailored to the business at hand will be helpful generally. It will:
- help regulate the day-to-day relationship of the business and the partners involved in it;
- create clarity and certainty with an agreed set of contractual commitments and obligations; and
- be helpful if there is a dispute later down the line.
If there is no partnership agreement the default position is that the Partnership Act 1890 – yes 1890 – applies to general partnerships. LLP’s are more modern with the governing legislation being the Limited Liability Partnerships Act 2000, supplemented by various regulations since then. In either case the default positions may not be suitable to the business at hand, and thinking through what should be formalised into a written agreement is just common sense.
There’s no hard and fast rule on which type of partnerships are relevant to which sector, but commonly we encounter general partnerships in the agricultural sector, theatrical/entertainment and still in GP and veterinary sectors. LLPs are more common to professional service delivery businesses and some property development joint ventures
As said the default provisions applicable may not be suitable or appropriate, so it is sensible to have a formal written partnership agreement agreed and signed to override the default provisions (and/or in the case of the 1890 Act, fill in the gaps…).
The default provisions, whilst slightly differing for general partnerships and LLPs, will create:
- equality in profit and capital share (regardless of whether that is desired);
- joint liability to contribute equally to any losses of the business (in the case of a general partnership);
- entitlement for every partner to take part in management;
- no entitlement for any partner to be paid for acting in the business (yep you read that right as well);
- no clear mechanisms for dealing with a departing partner.
On the other hand a written agreement may cover things like:
- details of capital contribution of each partner, and regulating different amounts/percentages;
- the distributions of profits;
- how losses (if any) are proportioned across different partners;
- how disputes are handled;
- how new partners are admitted and how departing partners are dealt with;
- holidays, maternity, paternity, adoption, and bereavement leave etc. (which are all now concepts arising the default statutes came into force); and
- how you vary the agreement, if you need to.
To conclude, it really is better to have the discussions up front and agree and sign a balanced and sensible commercial document when everyone is agreeable to that at the beginning, rather have nothing in place at all if a dispute occurs later.
If you would like to discuss preparing a partnership agreement, please contact Jacksons’ Corporate and Commercial team on 01642 356500/0191 2322574.
Peter Robinson, Partner and Head of Corporate and Commercial
