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The Dangers of Not Having a Partnership Agreement

It is very easy to set up a partnership and even just an oral agreement can be sufficient to form a partnership arrangement. The law says that a partnership is quite simply the relationship which subsists between persons carrying on a business with a common view of profit. So even you and your friend gardening together and dividing the profits could mean that a partnership has been formed. A partnership is governed by a partnership agreement and would regulate the powers and duties of the partners in relation to the business. It could also dictate the way assets or liabilities are divided upon dissolution of a partnership. However, if a partnership agreement has not been drawn up, then the powers and duties of the partners is regulated by the Partnership Act 1980. This legislation does not cover all circumstances and eventualities, and as such partners can find themselves stuck in a situation where there is no legal recourse. Below are two of the many dangers that you could face if you conduct your business without a formal partnership agreement.

Disagreements Between Partners Can Result in Dissolution of the Partnership

The Partnership Act 1980 allows any one or more of the partners to dissolve the partnership at any time, even if the remaining partners wish to continue the business. Unless you can come to an agreement as to the partners exit and the division of any assets, then the only option may be to dissolve the partnership.

Further, the Partnership Act does not give partners the power to remove another from the partnership if they begin to cause trouble. So, you could be stuck in a situation where a rouge partner is making decisions and behaving in a way which is damaging the business, and you and your other partners wish to remove them from the business. This is not possible under the Partnership Act without their consent. And as you may have guessed, getting consent is very unlikely. So, the only way to remove this partner would be to dissolve the partnership and bring to an end an otherwise profitable business.

By having a Partnership Agreement drafted, clauses could be included which anticipate such situations, and have a dispute resolution procedure which will help prevent long, protracted disputes.

Death or Bankruptcy Could Spell the End of the Partnership

Under the Partnership Act, the death or bankruptcy of one of the partners will automatically cause the dissolution of the partnership. There are no protections for the other partners, and an otherwise successful business could be forced to close its doors. If your partner does die, then you would owe the partners estate their share of the partnership at the date of the death. If there is any dispute or debate about the sharing of the partnership, this could lead to a long and distressing dispute between you and the partners estate.

A carefully drafted Partnership Agreement can include clauses which anticipate death or bankruptcy and allow the partnership to continue once the deceased or bankrupt partners share is bought by the remaining partners. In addition, clauses can be included which dictate the sharing of the assets upon dissolution, and if any disputes arise, can dictate a dispute resolution procedure which can make the breakup of a partnership much less stressful.

If you run a business as a partnership, and haven’t got a partnership agreement already in place, please do not hesitate to contact me on 01133 50 40 30 or at hello@scesolicitors.co.uk.

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SCE Solicitors is a boutique employment law practice based in Leeds which advises clients nationwide.  Please note that the information in this blog is to provide information of general interest in a summary manner and should not be construed as individual legal advice. Readers should consult with SCE Solicitors or other professional counsel before acting on the information contained here.

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