Do we need a Partnership Agreement?
A partnership does not have to have a written agreement in place and is automatically created when two or more individuals carry on a business in common with a view to a profit. As a result, I often come across people in the farming community who have dismissed the need for such an agreement. An “unnecessary expense” and “we can deal with that later” are reasons commonly cited. Unbeknown to those individuals, where there is no written agreement in place, the working relationship between the partners is still governed by a historic statute - the Partnership Act 1890. This brings with it many unintended consequences. This includes (1) the dissolution of the partnership on the death of a partner, and further, a partner being able to (2) retire at will (without giving any notice period), (3) dissolve the partnership on notice (without the consent of the remaining partners), and (4) take an equal share of the profits, irrespective of the size of their capital account and working contribution. The list goes on…
A written Partnership Agreement looks to sweep aside any ramifications of the 1890 Act, outline any specific terms that have been agreed between the partners and bring to mind matters that had not been previously considered, i.e. what happens on the death or retirement of a partner.
Whilst each agreement should be tailored to the business and the needs of the partners, key points every Agreement should cover include who the partners are, what the profit-sharing arrangement between those partners is, what the purpose of the business is, how decisions are made, the arrangements in place for the introduction of a new partner into the business and the exit strategy of a partner. A modern partnership agreement will need to reflect the annual accounts and critically, make clear what assets belong to the partnership. The latter point is of particular interest when looking to bring on succession – you do not want the son thinking he owns a third of the farm simply because he has become a partner of the business with his parents!
Having your existing agreement reviewed and kept up to date is also recommended. I recently came across a partnership agreement of little use owing to the fact all the partners referred to on the document had passed away.
It is in the mutual interest of all partners to have a written agreement in place. Not only does this help clarify any uncertainty, but it also ensures the partners know where they stand helping reduce the likelihood of a dispute arising.
If you require a partnership agreement drawing up or simply require an existing agreement to be reviewed, please speak to Oliver Riley on 01845 522324.
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