The importance of a partnership agreement


What does a partnership agreement do?

A partnership agreement sets out the terms and conditions under which individuals entering into business together will operate.

Why is an agreement important?

Fundamental to any partnership are the arrangements for cash contributions the partners will make, decision-making powers, and profit sharing. In the absence of a partnership agreement, these issues are determined by the Partnership Act 1890 or Limited Liability Partnership Act 2000.

This “one size fits all” solution is not appropriate for the huge variety of partnership that exists, so a partnership agreement setting out key understandings between the partners is needed.

It may be hard to imagine in the early days of the partnership, but over time you and your partner will encounter events that could cause tensions. A partnership agreement reduces the possibility of arguments by determining in advance a policy for specific events.

These could include:

  • Losses to the partnership
  • Someone else wanting to join
  • One of you deciding to leave

If a serious disagreement happens, the partnership agreement is your legal basis to force the other partner to actually come to work, or to eject them from the partnership.

Even if you have an unshakable bond of trust with your partner, a partnership agreement still has advantages. The process of preparing the agreement helps you build a business strategy as it throws up issues you might not otherwise have considered. Unless you arrange otherwise through a partnership agreement, the partnership dissolves if one of you dies or is declared bankrupt, which could cause all sorts of legal and practical problems.

A partnership agreement is all but essential for any partnership-based business. Take advice from a solicitor to ensure your agreement is soundly drafted and well suited to you and your partner’s circumstances. Call us or fill in a web-form and we will find you a solicitor who can help.

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