Understanding what a partnership agreement is and how it can benefit you can be challenging.
That's why in this article, Corporate & Commercial expert James Privett outlines the need to knows about partnership agreements.
What are the two main types of partnership?
There are two main types of partnerships under English Law,
- An unregistered partnership under the Partnership Act 1890
- A limited partnership under the Limited Liability Partnerships Act 2000 (an LLP).
What is a partnership agreement?
A partnership agreement is the basic constitution of a partnership.
It is important to demonstrate to third parties, such as HMRC, financiers or important customers that a partnership does exist as a business entity but also to record the terms on which the partners will operate the partnership.
What is the main purpose of a partnership agreement?
The partnership agreement deals with some fundamental issues about the partnership, such as,
- The nature of its business,
- The duties and powers of partners,
- The duration of the partnership,
- How profits (or losses) are shared,
- The provision of finance and,
- How changes of partners can take place.
It can also deal with what would happen on the death or disability of one of the partners.
Why do partnership agreements exist?
A partnership agreement is essential for both registered and unregistered partnerships, as it is the only document that sets out the partners’ agreed commercial terms and how the firm will be run.
For unregistered partnerships, it also serves as proof that the firm exists.
What is the importance of a partnership agreement?
Partnership agreements are important as they provide clarity, stability and protection for partners.
Unlike with companies, partnerships have very few default rules if there’s no partnership agreement in place and the default rules which apply will not be appropriate.
For example, without an agreement, a partner in an unregistered partnership can terminate the partnership at any time and is entitled to an equal share of the profits.
Even in a limited partnership, without an agreement all partners have equal rights in decision making and an equal profit share. This can often not be what the individual partners intended.
Is it necessary to have a partnership agreement?
A partnership agreement isn’t necessary to form an unregistered partnership. It will automatically come into existence if two or more people run a business together with a view to make profit.
A registered partnership is created as an LLP by registering the basic details of the partnership at Companies House but no agreement needs to be filed.
What are the advantages and disadvantages of a partnership agreement?
The advantage of having a partnership agreement is that it sets out the terms about how the firm’s business will be carried out. This will avoid disputes between the partners and protect the partners’ interests in the firm.
For example, by sharing profits or liabilities in agreed proportions. If it is an unregistered partnership, it can be used to show third parties that the firm exists.
The only disadvantage is the time and cost involved in setting up the agreement, which is minor compared to the benefits it provides.
What is a Limited Partnership?
A Limited Partnership (LLP) is a type of company without shareholders which means that it can,
- Trade in its own name,
- Hold property and exists indefinitely.
What is the advantage of a limited partnership compared to an unregistered partnership?
One advantage of an LLP is that partners are taxed in the same way as partners in an unregistered partnership, which is why LLPs have become so popular. An LLP will however need to file annual accounting and other information with the Registrar of Companies, but the obligations are not onerous.
It also gives partners limited liability, meaning they aren’t personally responsible for the partnership’s debts. This is different to partners in an unregistered partnership, who are liable for the partnership’s debts.
Partnership Agreement Experts
At Frettens, our Corporate & Commercial Team is one of the most experienced and best resourced in the area.
If you have any questions after reading this article, or would like help drafting a partnership agreement, you can contact one of our experts on 01202 499255. We offer all new clients a free initial chat.
Comments