How are profits shared in a Partnership with no formal agreement?
A partnership agreement outlines the division of profits and losses between partners.
So what happens in the absence of a partnership agreement?
A partnership can come into being without a written partnership agreement — created purely by two or more people working in business together with a view to profit. There are often no complications until there is a disagreement.
In the absence of specific provisions, Section 24 of the Partnership Act 1890 states that profits and losses are to be divided equally. One immediate issue with this is that partner contribution and involvement may not be equal and, therefore, not merit an equal share of the profits.
The law does not permit a pro-rata apportionment of profits for part-time partners. Nor does it allow for a higher share of the profits for sleeping partners that are not directly involved in operating the business but who contributed a large proportion of capital at the outset.
A lack of partnership agreement can cause numerous other problems, particularly when there are losses which are often argued about more bitterly than profits. Under Section 26 of the Act, any partner can dissolve the entire partnership with immediate effect by giving notice to the other partners. This nuclear option can be useful in creating leverage if there is no formal agreement.