Rules of the game

A significant number of partnerships do not have any form of agreement and others rely, mistakenly, on an out-of-date one. We all know of partnerships that have gone through disputes, or even broken up, because they did not have a regularly reviewed agreement. Indeed, a good one should provide a mechanism for resolving many difficulties.

Without an agreement, partners are subject to the Partnership Act of 1890 – which is often inappropriate for business today. For one thing, their partnership would be automatically dissolved if a partner left for any reason and profit is always shared equally.

There are several benefits for partners in having an agreement. First, it provides for certainty by demonstrating that a partnership exists. Second, an agreement concentrates the mind on specific issues, such as retirement, succession and profit sharing. This enables many issues to be dealt with before they can become disputes. Moreover, since a modern partnership agreement can override the Partnership Act, practices can devise a document to suit their particular partnership at that time.

It is not unknown for people to find they are in a business partnership without realising it, and this can bring unlimited financial liability. It is therefore important to know what constitutes a partnership. Put briefly, it is a business carried on jointly by two or more people (or companies or unincorporated bodies) with a view to making a profit. It could be a one-off venture with another person, for example, for the purchase and sale of a property. That said, if an architect, builder and estate agent agree to co-operate on a joint project, this does not automatically mean they are in partnership. Clearly, there is a fine line between co-operation and partnership, but the point is to be aware of the potential difficulties.

The agreement should say who is involved in the practice, the nature of the business, the firm's name and its address. Typically, financial issues require the greatest care. The following are key:

Capital. How much should each partner put into the pot?

Profit sharing. How should this be done and (possibly more importantly) how should losses be shared? This can cause difficulty if partners do not bring in the same level of business or capital, or if one partner concentrates on administration.

It is not unknown for people to find they’re in a partnership without realising it, and this can bring unlimited financial liability

Drawings. How large an advance can partners take each month on the profit they hope to make? And if insufficient profit is made, how should the money be paid back?

Changes of partner. Decide how the partnership deals with this, including the avoidance of dissolution on a retirement. Typically, the original partnership deed is amended by supplemental agreements.

Death or sudden departure of a partner. What happens when a partner dies or leaves due to ill health, bankruptcy, criminal act and so on? Should the executors of a deceased partner be able to participate in the partnership?

Owning business accommodation. Some partnerships own the properties from which they trade and such ownership is not necessarily in the same proportions as the allocation of trading profit. How is this accounted for in the agreement?

Management. Who should run the partnership? Do all partners need to be consulted on, and agree on, all matters?

In addition to the above, an agreement should aim to protect partners, in particular new and retired ones, from unlimited liability and joint and several liability. In fact, all partners face unlimited liability, so it is vital to arrange insurance to cover employers' liability, professional indemnity and third-party liability.