The law relating to Partnerships is governed by the Partnership Act 1890 which dates back to when business was frequently carried out through the medium of partnerships before the shift towards limited companies. Given this legislation has not been updated in any significant form since, the Partnership Act 1890 provides, what is now, an antiquated way of doing business in the 21st century.
The way the Partnership Act works is that it sets out a set of default rules that apply to all Partnerships unless agreed to the contrary. There is significant flexibility to deviate from the default position and tailor your partnership to your needs and the needs of your business – this is usually done through a formal Partnership Agreement between the partners.
Dissolving a Partnership
Some of the default measures under the Partnership Act 1890 are fairly draconian, particularly when it comes to terminating, known as ‘dissolving’, the Partnership. Under the default provisions, if a Partner wishes to exit the Partnership they can serve notice to that effect and the Partnership has to be dissolved. Dissolution of a Partnership brings to an end a formal Partnership and either starts a new one between the remaining Partners or can involve a partnership winding up its business, collecting in its debts, settling its liabilities and returning any surplus cash to the Partners with no option for them to buy out the Partner who wants to leave.
Death of a Partner
The death of a partner has a similar effect in that, unless agreed to the contrary, the Partnership must be automatically dissolved on the death of a Partner. Therefore, entering into a written Partnership Agreement is of paramount importance so there is a mechanism to allow the Partnership to continue if one dies or exits. The formal agreement will set out how this is done and how the exiting Partner is paid for their share of the Partnership without having to go through the upheaval of a formal dissolution of the Partnership each time this happens.
Key Matters covered in a Partnership Agreement
A properly written Partnership Agreement will cover a number of other important matters such as:
- Entitlements to share in the capital and profits.
- Day-to-day operational matters around decision making and limits of authority.
- A mechanism for dealing with the death or retirement from the partnership.
- A mechanism for calculating the sums due to an out-going Partner and how and when these sums are paid.
- Potential restrictions on the Partners from being involved with competing businesses going forward.
If you would like to speak to me or one of my colleagues in the Corporate/Commercial team in regards to a Partnership Agreement or a matter regarding your business, please ring 0161 930 5151 or email your query to enquiries@gorvins.com.