Top 5 Reasons You Need A Partnership Agreement
Do you need a written partnership agreement? We think you do. While having a written agreement in place is not a requirement for carrying on your business, without one, the fate of your partnership is out of your hands. So, whether you’re just starting out on your new business venture, or yourself and your partners have been in business for a while, it’s never too early (or late) to get something down in writing.
Here are our top 5 reasons you need a partnership agreement in place:
1. Free Your Mind
One of the most beneficial outcomes of having a written partnership agreement is that it can provide clarity and certainty to the relationship between the partners. How do you want to share the profits? What will you do if one of you wants to retire or leave? The default answers to these questions are contained in the Partnership Act 1890 and without your own document governing what will happen, the Act will automatically apply. Your own partnership agreement can help you plan for the future, and ensure yourself and your partners are all on the same page.
2. It’s The End Of The World As We Know It
The absence of a written partnership agreement can be particularly problematic if one partner wishes to dissolve the partnership and the others do not. Under the Partnership Act 1890, a partner can give notice to dissolve at any time, without reason, and it can have immediate effect. The rules also provide that the partnership will dissolve if one of the partners dies or becomes bankrupt. The Partnership Act 1890 on dissolution splits all assets on an equal basis when the partnership comes to an end. What if you’ve put in more than other partners? Can you risk losing that money? By having a written agreement in place, you can avoid an abrupt finale and control how, when or if your partnership business should come to an end.
3. Money For Nothing
Without a written partnership agreement reflecting how much each partner has contributed to the business, the default position is that profits are split equally amongst all partners. So, if one partner has invested significantly more money than another, or spends significantly more time carrying out partnership business, the profits they enjoy will not reflect this investment. With a written partnership agreement, you can ensure profits are distributed according to what is fair in your business.
4. Come Together
Where there is no written partnership agreement in place, under the Act, all partners will be jointly and severally liable for debts and obligations incurred. In reality this means that, regardless of which partner is at fault, a creditor is able to pursue the partner with the most assets to satisfy debts, then the next, and so on until all debts are satisfied or until all partners are made bankrupt. A partnership agreement allows you to outline the business the partnership will carry out, and more importantly, each partner’s responsibilities.
5. Don’t Look Back In Anger
Finally, having a written partnership agreement allows for more exacting restrictions to be placed on partners when they leave the business. Restrictions can be put in place to stop the exiting partner poaching clients, staff, and business, and prevent them from setting up in competition the day after they leave. Ironing out what each partner can or cannot do if they leave the partnership will help protect the business after their departure, and hopefully act as deterrent to any partners thinking of going it alone.
Our Corporate Commercial Team can help set your partnership on the right track – contact us on 01323 407555 for an initial consultation about your partnership needs or email us at firstname.lastname@example.org
Written by Adele Fields
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