Are you in a business partnership? Do you even know what a partnership is? Unsure whether you need a Partnership Agreement in place? Read on…

The Partnership Act 1890 defines partnership as “persons carrying on a business in common with a view of profit.” As with all areas of law this may seem pretty straight forward, but there have been cases where it has been decided that there was a partnership, despite an individual taking no share of the profits. In this case for example it was decided that there was a partnership as profit was intended. Partnerships can be created without even realising it! A partnership occurs where 2 or more people go into business together. Both registered as self-employed and are of no separate legal identity.

A partnership is a contractual relationship, and it may be created orally with no formal written agreement but it is always advised that a written contract is put in place. As it is a contractual agreement, a partnership is only created if all the requirements of a contract are fulfilled. What is a Contract? Often when a contractual relationship breaks down it is then the courts need to decide whether a partnership existed in the first place and if it did then there are implications on all parties involved.

The Partnership Act 1890 sets out 9 terms which are implied into this contract should there be no written formal agreement, this is why it is important that you get a Partnership agreement in place. They include for example:

  • All the partners are entitled to share profits equally. If you don’t want this to be the case get an agreement.
  • Partners are entitled to an interest rate of 5% per annum for payments or advances, many Partnership Agreements would change this.
  • If not all partners are involved in making the management decisions then this needs to be expressly stated. If a partner has been excluded without an agreement this can be a reason to dissolve the firm.
  • Partners have the right to a salary and should this not be the case then put it in an agreement
  • All partners must agree should they bring on new partners, want this different then yes, get an agreement.

It is also worth remembering that in the absence of an agreement property will be partnership property if there is an implied agreement to that effect.

Still unsure whether you need a partnership agreement? Want to chat with someone about getting one drafted?

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