Partnership Agreement

Article Written By: netlawman

A partnership will be implied by the law when two or more people are in a business relationship together with the view to making a profit. Where there is no express agreement, the Partnership Act 1890 will imply certain terms into a partnership. It is, however, advisable to have a written Partnership Agreement.

The essential elements of a partnership are:

Each partner is entitled to share the net profits of the business. A contract need not provide for equal shares. It may depend upon how much the partner has invested.

Partners are jointly and severally responsible for all the debts and obligations of the business without any limit, including loss and damages arising from wrongful acts or omissions of their fellow partners and potential liability to third parties.

Partners have equal rights to make decisions which affect the business or the business assets. All individuals share the ownership of the assets of the business, although they may have agreed that the firm will use an asset which is going to buy one of the partners individually.

A formal written partnership agreement may accomplish the following goals:

To minimize misunderstandings among the partners by fully setting forth each partner's rights, duties and liabilities.

To provide guidance on what to do in the event of a dispute among the partners.

To provide the sort of clarity and stability that investors and bankers prefer

Two or more individuals as co-owners of a for-profit business. All partners are responsible for the liabilities and debts of the partnership. For tax purposes, partnerships enjoy single taxation. Income is reported as part of each partner's personal income.

A general partnership which elects to operate as an LLP. Unlike a General Partnership, the partners in an LLP enjoy protection from many of the partnership's debts and liabilities. For tax purposes, the income of an LLP is taxed in the same manner as a General Partnership.

A partnership with at least one General Partner and one Limited Partner. A limited partner's liability is limited to the amount invested, while the General Partner(s) assumes all the liabilities and debts of the partnership. For tax purposes, the income is taxed in the same manner as a General Partnership.

A silent partner is one who still shares in the profits and losses of the business, but who is uninvolved in its management, and/or whose association with the business is not publicly known; these partners usually provide capital.

As you can see it is folly to operate a business under any partnership basis without an agreement in place. Net Lawman provides you expertly drafted partnership agreements.

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of a limited partnership

In the United Kingdom LLPs are governed by the Limited Liability Partnerships Act 2000 (in Great Britain) and the Limited Liability Partnerships Act (Northern Ireland) 2002 in Northern Ireland. A UK limited liability partnership is a corporate body - that is to say, it has a continuing legal existence independent of its members, as compared to a Partnership which may (in England and Wales, does not) have a legal existence dependent upon its membership.

In a traditional partnership, if the business makes losses or is successfully sued, the individual partners are liable; this includes their personal possessions, homes, money etc. An LLP has limited liability, so is much safer for the partners, as they are not personally liable for any losses.

On the other hand, an LLP requires:

registration (£95) at Companies House

more strict (but not particularly difficult) administration to meet Companies House rules annual publication of accounts.

Furthermore, general partners have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liabilities depending upon circumstances. The liability of limited partners is limited to their investment in the partnership

The only disadvantage is that like a company, the LLP has to be incorporated at Companies House and must file yearly accounts and an annual return with Companies House. The accounts and return are then available for inspection by anyone, so there is a loss of financial privacy

In general, the LLP seems a better option for most businesses unless you are particularly confident about the risks (of losses or claims) of a traditional partnership or have reservations about revealing your accounts to the public (where your customers and competitors can inspect them).

Unfortunately, this is not a matter for us to consider. It is advisable to seek comprehensive professional advice. Net Lawman shall, however, be happy to discuss your situation with you and recommend you best option subject to your situation.

Partners are free to agree to any terms they like, provided the terms are not illegal or contrary to public policy. With that in mind, a business partnership agreement includes provisions relating to the following:

Nature and purpose of the partnership. This guarantees that partners will not deviate from the essential purpose of the business.

Capital contributions of each partner. This ensures that no one can dispute a partner's capital contribution to the business. The contract should also account for other non-cash contributions such as goods, services, or time.

Profit and loss allocation. Normally a partnership allocates profits and losses equally, but this isn't always the case.

Authority of each partner. The contract should determine which partner or partners will run the partnership on a daily basis, how the duties will be divided, and how decisions will be made.

How to admit new partners. Most agreements require a unanimous vote to admit new partners.

A course of action in case a partner dies. Normally, when one partner dies the partnership is automatically dissolved and liquidated. You don't have to accept this process, however; it's your agreement, and you can do what you want.

How to buy out a partner's share. The contract should dictate which circumstances — such as death, divorce, or illegal activity — require the partnership to buy out a partner's share in the business and how to execute the buyout.

Signature authority on partnership bank accounts. You may allow each partner to sign on behalf of the whole partnership, or you may require all partners to sign all checks.

Conflict resolution. There may be times when you simply cannot resolve a dispute. The contract may allow partners to hire a mediator or to submit the problem to binding arbitration instead of pursuing traditional legal action.

Miscellaneous provisions may be included in the business partnership agreement, depending upon the nature of the business and the wishes of the partners. For example, the partners may consider adding a non-compete clause to prevent withdrawing partners from taking unfair advantage of the partnership. The partners may also consider adding provisions for resolving disputes among partners and for methods of partnership accounting and record keeping.

If disputes arise between partners in a partnership you need resolution swiftly to avoid matters turning acrimonious and leading to difficulties in the continued running of the partnership business and reputation. Following disputes usually arise:

Dealing with issues arising on leaving the partnership

Termination of the partnership

Poor performance of partners

Employment law rights and the status of partners

Advising individual partners on discrimination rights including age and sex

Defending discrimination claims for partnerships

Splitting up assets and dealing with liabilities

Restrictive covenants and advising of enforcement

Mediation and alternative dispute resolution