Why a Partnership Agreement is Important and What it Might Cover

When entering into a business partnership, understanding each partner’s responsibilities and roles within the company is essential. 

The legal structure of this type of organisation means each partner owns a share and is also responsible for its day-to-day running. 

A contract governing this relationship provides a clear foundation for business operations while minimising the risk of disputes. 

A partnership agreement should address several key issues to be fully enforceable and sufficiently protect each party’s interests. 

This article explains how to draft the document, what it should include, the risks of failing to prepare one, and the different stages of a partnership relationship. 

Helix Law is a firm of specialist litigation solicitors. 

We are frequently instructed in partnership disputes when agreements exist — and when they don’t.

If you find yourself in a dispute with your partners, contact Helix Law. 

What Is a Partnership Agreement?

A partnership agreement is a contract between business partners outlining their rights, roles, and responsibilities within a company. 

It is legally binding and voluntary, although even small ventures should have one in place.

A partnership agreement as a contract shares many similarities with a shareholders agreement. 

It’s a document entered into at the outset of a business relationship that seeks to codify an agreement on what should happen if certain events take place — almost like a business prenup.

What Does a Partnership Agreement Include?

A well-drafted partnership agreement should include the following elements, although partners can tailor it to meet their specific needs and goals:

• Contributions: How much capital, property, labour, skills, or experience has each partner put into the business?
• Ownership: Who owns shares, and in what proportions?
• Daily operations: Who is responsible for what?
• Decision-making: Who has the authority to make different types of decisions?
• Profit and loss: How much is each partner responsible for?
• Entry and exit: What is the process for leaving the business? How do new partners join?
• Dispute resolution: How will the partners resolve issues between them?

What Are the Risks of Not Having a Partnership Agreement?

In the absence of a formal written arrangement, the relationship is subject to the default legal provisions set out in the Partnership Act 1890 (the ‘Act’), which may not align with the partners’ intentions.

For example, under Section 9 of the Act, all partners are jointly liable for company debts, even if only one person incurred those debts or did so without consulting the others. 

The only way to ensure each partner is liable for a specific proportion of liabilities is to set out terms in a customised contract. 

Relying on the Act rather than a tailored contract can also create uncertainty regarding each person’s role within the organisation. 

Section 5 of the Act permits each partner to enter into binding commitments on behalf of the others. In contrast, they may want an arrangement requiring at least two partners to consent to any business contracts. 

Without a written contract, the likelihood of a dispute substantially increases, negatively impacting the company’s stability and reputation. 

In the absence of a partnership agreement, the actions or misfeasance of one partner can significantly harm the others.

Suppose one partner takes out a car loan as a business expense and fails to pay. 

Without a contract stipulating otherwise, the other partners may be held liable for the debt. 

If the contributions of partners are unequal, partners who contribute more are less likely to see a fair return on their investment without a written contract. The default rules state all profits and losses are to be shared equally. 

A well-drafted agreement helps ensure a fair accounting of each partner’s contributions and equitable sharing of profits. 

How To Draft a Partnership Agreement

1. Identify the business’s purpose and structure

The contract must address the basics, including each partner’s details, the partnership’s name and purpose, the date it will begin and its duration. The relationship can be for a fixed term or continue indefinitely, with a clause included about when and how the partners can dissolve it or withdraw. 

2. Outline financial arrangements

State each person’s capital contribution, how they can make additional investments, and what type of capital will be accepted. Specify how the partners will share profits and losses and their financial responsibilities, for example, who can reinvest funds and who must keep accurate accounting records.

3. Define roles and responsibilities

Identify who is responsible for the business’s day-to-day running and decision-making, and specify if unanimous or majority consent is necessary for certain decisions. The contract can also highlight when partners meet and how they communicate.

4. Address dispute resolution and partnership changes

Include a clause detailing how partners might deal with a dispute. The document should also address how new partners can join or be expelled and how to distribute finances in the event of a dissolution. 

5. Seek legal advice

A solicitor should draft or review the agreement to ensure it covers all relevant issues. A legal adviser can also guide the partners on the appropriate set-up to suit their needs and overall vision. It is also vital to check that the contract complies with the laws of England and Wales; otherwise, it may be unenforceable. 

As expert litigation solicitors, Helix Law does not draft partnership agreements.

We only deal with partnership matters when a dispute arises. 

What Are the Stages of a Partnership Agreement?

1. Initial Partnership

The first stage involves initial discussions and ironing out basic details. Partners discuss their overall goals, the company’s structure, its name, their capital contributions, and fundamental roles and responsibilities. They’ll also prepare and sign the partnership agreement, identifying the primary terms to ensure they align with their joint vision. 

2. Full Partnership

At this stage, the business is fully operational, and the partnership agreement should govern how partners make day-to-day decisions. There should be full compliance with the agreement, with each person carrying out their roles effectively while working together to promote the business’s continued growth and success. 

3. Continuity and Succession Planning

To ensure the business’s longevity and resilience, the partners must plan for potential changes, including another partner’s death or departure. Ideally, the contract will address buyouts, succession planning, and how to introduce new investors. For example, how will a share be passed on if a partner dies? Revisions should made over time to ensure the contract remains valid and adapts to changes in circumstances. 

Frequently Asked Questions

Do Partnership Agreements Need To Be In Writing?

Under English law, an oral agreement is binding. However, preparing a partnership agreement in writing is advisable for clarity and consistency. Certain provisions must be in writing to be legally valid, and a written document is much easier to enforce in court. Written agreements are easier to advise on—and ultimately litigate—if a partnership dispute can’t be resolved through negotiation. As a consequence, legal costs are often lower.

Is a Partnership Agreement Legally Binding?

Provided the partners execute the document correctly, and it’s signed and dated by every party, it will be legally binding. Each person must enter into the contract willingly and with full knowledge of its implications. A breach of the agreement could result in legal action. It’s also usually possible to litigate a partnership dispute where there is no agreement in writing. 

Can a Partnership Agreement Be Modified or Changed?

The contract can be changed, but how this is done will depend on its terms. A partnership agreement should specify the mechanisms for its modification so the partners can amend it as necessary. In the absence of a contractual provision, Section 19 of the Act requires the consent of all parties to make any changes. 

Final Thoughts

A well-drafted partnership agreement is a powerful tool that helps ensure smooth business operations and long-term stability. 

The document should clearly define each person’s roles, responsibilities, and contributions to minimise the risk of future disputes and ensure the formal relationship aligns with the partners’ intentions rather than the default legal provisions under the Partnership Act 1890.

Partnership disputes often arise out of unforeseen circumstances and events. 

An expertly drafted written agreement can help partners avoid common pitfalls and protect all parties against the risk of having conflicting expectations if a dispute occurs. 

Partnership agreements make resolving disputes quicker, easier and less expensive — even if the circumstances ultimately lead to litigation. 

By following the steps outlined above and understanding the different stages of a partnership, you can create a solid foundation for your new venture while protecting your interests. 

The key players should prepare to adapt as the business grows, and the agreement should be amended to reflect operational changes. 

If you’re in the process of forming a partnership or need to review your existing agreement, we recommend seeking independent legal advice to ensure you have a watertight contract. 

Helix Law’s expert commercial litigation solicitors don’t draft or advise on new partnership agreements.

However, we’re happy to recommend one of our trusted partners who is well-placed to assist.

If you’re involved in a partnership dispute, Helix can help. 

Our specialist commercial litigation team acts nationally and is frequently instructed in partnership disputes nationwide. 

Contact us today for further advice. 

We aim to respond to all queries within an hour.