What you need to know about partnership agreements if you are thinking about goig into business as a partnership.
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.
Essentials Elements of a Partnership Agreement
The essential elements of a partnership are:
All individuals share the risks and rewards of the business.
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.
What is the Purpose of a Partnership Agreement?
A formal written partnership agreement may accomplish the following goals:
To minimize misunderstandings among the partners by fully setting forth each partners 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
Types of Partnerships
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 partners 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 partnerships 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 partners 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.
Limited Liability Partnership
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 partners 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.
Difference between Partnership and Limited Liability Partnership
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 (ï¿½95) 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
Disadvantage of Limited Liability 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
Which is better option?
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.
Net Lawman supply forms for either type of partnership: a traditional Partnership Agreement or a LLP Agreements
What Provisions Should the Articles of Partnership Include?
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 partners 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 isnt 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 dont have to accept this process, however; its your agreement, and you can do what you want.
How to buy out a partners share. The contract should dictate which circumstances ï¿½ such as death, divorce, or illegal activity ï¿½ require the partnership to buy out a partners 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 cheques.
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 Terms to Include in the Partnership Agreement
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
Net Lawman expert team of Solicitors and Barristers advise both partnerships and individual partners on disputes and what can be done about them.
Net Lawman documents are up-to-date in simple plain English with explanatory notes.
As we cannot be experts in every relevant subject, we would love to receive 'guest' articles that may be of interest to anyone running their own business or thinking of doing so. ADD YOUR ARTICLE