Why you really do need a partnership agreement
PARTNERSHIP PROBLEMS & THE PARTNERSHIP ACT
Many partnerships start out when two people already know each other; most often they are friends who shared a good business idea or former colleagues. When two or more people start a business based on a partnership, that business is known as a firm.
In the heady days of concentrating and growing the new business and raising finance, one of the things most often overlooked is formalising the arrangements. Very often it is not until cracks start to appear in the business relationship that the parties ever wish they had spent time on a partnership agreement. With Lime One it does not have to be an expensive job, our agreements come in standard, tailored and specially written and range from just £60-£650 plus VAT.
NO AGREEMENT?
So what happens when you don’t have a partnership agreement in place?
In the absence of an agreement, the starting point is an 1890 Act (no misprint - it really is over 100 years old) which is the Partnership Act.
The act defines a partnership as being “the relation which subsists between persons carrying on a business in common with a view of profit”. There are some complex rules for determining exactly when a partnership even exists (for example it’s not enough that premises are in joint names) but it all depends on receiving a continued share of the profits of a business (as opposed to a one off payment in one year only, for example).
(1) Bind the firm
Starting as a practical level, any one partner can actually bind or commit the firm in most ways. For example, one partner can commit the partnership to a contract to purchase goods and services and, unless the party supplying those goods or services knows that the particular partner either hasn’t got authority (generally because the form has made him aware by serving a notice on him), or doesn’t know or believe he is a partner, the whole partnership is bound to that contract.
(2) Jointly liable
Having established that one partner can actually bind/commit the firm, the act also makes all the partners jointly and severally liable for everything for the period they were a partner, but not for anything that occurred before they become a partner or after the date they leave the partnership.
Each partner of the firm will be liable for all the
- wrongful acts and/or
- omissions
- admissions and/or representations concerning the partnership affairs (such as to the Bank or HMRC)
by any one partner who is acting in the ordinary course of the business of the firm, or with the authority of the other partners in exactly the same way as if each partner actually committed the act or omission. It follows that the firm will be liable for all the losses which follow because of such acts or omissions.
Taking this further, even if one partner, for example, takes a customer’s money and misapplies the money, the firm need to make good the loss to that customer.
Likewise if there is money outstanding the creditor can simply pursue just one partner and leave that partner to sort out getting part payment back from the other partner(s).
Whilst it is true that they can still do this if you have a partnership agreement in place, you can at least provide for procedures and responsibilities to deal with problems within an agreement.
(3) Holding Out
Anyone who allows others to think he is a partner or conducts himself as if he is a partner is liable when it comes to being pursued by one of the firm’s creditors.
(4) Property
In the absence of a partnership agreement, the following applies:
- All property either brought into the partnership or bought with partnership money is deemed to belong to the firm