Under English law there is no requirement for partners in a partnership to have a written partnership agreement. By virtue of the Partnership Act 1890 (the “1890 Act”) a partnership can automatically come into existence where persons are together “carrying on a business in common with a view of profit”.
The 1890 Act contains a series of provisions setting out what happens if there is no written partnership agreement in place. However, not all of the default positions are desirable, including those relating to:
- Management of the business;
- Holding of property;
- Sharing profits and interest on capital;
- Introducing new partners and removing partners; and
- Dissolution and the distribution of assets post dissolution.
Management of the business
The default position under the 1890 Act is that all partners can take part in the management of partnership business and that, generally, day to day matters are dealt with on a majority basis (except that new partners cannot be introduced, nor can the “nature of the partnership business” be changed, unless all partners agree).
Holding of property
The default position under the 1890 Act is that all property either brought into the partnership or bought with partnership money is deemed to belong to the firm.
Sharing profits/losses and interest on capital
The default position under the 1890 Act is that all partners are deemed to share equally in profits and to be equally responsible for liabilities. None of the partners are entitled to interest on the capital they have contributed to the firm. All partners are entitled to have access to the accounting records of the firm.
Introducing new partners and removing partners
The default position under the 1890 Act is that no person may be introduced as a partner unless every single existing partner agrees. In addition, the 1890 Act provides that even where a majority of the partners agree to remove a partner (for example if that partner has behaved in a way that could be highly damaging to the reputation of the firm), that partner cannot actually be removed unless “a power to do so has been conferred by express agreement between the partners”. So if there is no written partnership agreement the partners may be stuck with a partner they wish to remove unless the partnership itself ends.
Dissolution
The default position under the 1890 Act is that, unless the partners have agreed otherwise, any one of them has the right to give notice to his colleagues that he is dissolving the firm. There is no minimum period of notice, which could be limited to just a matter of days or even hours. In addition, the 1890 Act provides that unless the partners have agreed otherwise, the exit, death or bankruptcy of any partner automatically dissolves the firm.
Distribution of assets post-dissolution
The 1890 Act sets out the default position when it comes to distributing assets on the dissolution of a partnership. Firstly, all debts and liabilities of the firm are paid. Secondly, the partners who are due to be repaid for any advances made to the firm are repaid. Thirdly, any capital due to the partners is repaid. And finally, the balance is divided between parties according to percentage of profits they are due. If there are only losses then all partners must contribute towards those in accordance with their profit share percentages.
The 1890 Act also omits to make reference to a number of important issues, including:
- Restrictive covenants; and
- Goodwill.
Restrictive covenants
The 1890 Act fails to impose any form of restrictive covenant on an outgoing partner. Therefore, if the 1890 Act is being relied on there is nothing to prevent a partner from going to work for a competitor, poaching customers or clients, or poaching employees. If the partners want to impose restrictions on an outgoing partner they should do so in a written partnership agreement.
Goodwill
The 1890 Act makes no mention of goodwill valuation upon the retirement, expulsion or death of a partner. To avoid a dispute as to whether or not an outgoing partner is entitled to be paid for his or her share of any goodwill in the partnership the point should be covered in a written partnership agreement.
Useful provisions to include in a written partnership agreement
So in summary, where the default position under the 1890 Act is not satisfactory (which is going to be the case for nearly all partnerships), or where the 1890 Act omits to cover items that the partners would like to see covered, a formal written partnership agreement should be entered into.
Useful provisions to include in such a written partnership agreement include:
- Drawings;
- Management of the business;
- Time input, holidays, leave and illness;
- Holding of property;
- Sharing profits and interest on capital;
- Introducing new partners;
- Removing partners;
- Goodwill;
- Restrictive covenants;
- Dissolution;
- Distribution of assets post dissolution; and
- Dispute resolution.
Limited liability partnerships
A Limited Liability Partnership (‘LLP’) is an alternative corporate business vehicle that combines the flexible structure of a partnership with the benefits for its Members of limited liability. For further details about LLPs please refer to the article “Limited Liability Partnerships - Key Characteristics”.
Charities and not for profit organisations
Please note that by definition a partnership (and similarly an LLP) cannot be formed, or deemed to be formed, by persons operating a charity or a not-for-profit organisation. This is because the Partnership Act 1890 defines a partnership as being “the relation which subsists between persons carrying on a business in common with a view of profit.” For further details about the types of organisations/corporate vehicles that are available for charities and not-for-profit organisations please refer to the Charities pages.
For more information or advice on partnerships, LLPs or charities please contact Mark Lewis on 01926 880700.
