Without an agreement, partners are subject to the Partnership Act of 1890 – which is often inappropriate for business today. For one thing, their partnership would be automatically dissolved if a partner left for any reason and profit is always shared equally.
There are several benefits for partners in having an agreement. First, it provides for certainty by demonstrating that a partnership exists. Second, an agreement concentrates the mind on specific issues, such as retirement, succession and profit sharing. This enables many issues to be dealt with before they can become disputes. Moreover, since a modern partnership agreement can override the Partnership Act, practices can devise a document to suit their particular partnership at that time.
It is not unknown for people to find they are in a business partnership without realising it, and this can bring unlimited financial liability. It is therefore important to know what constitutes a partnership. Put briefly, it is a business carried on jointly by two or more people (or companies or unincorporated bodies) with a view to making a profit. It could be a one-off venture with another person, for example, for the purchase and sale of a property. That said, if an architect, builder and estate agent agree to co-operate on a joint project, this does not automatically mean they are in partnership. Clearly, there is a fine line between co-operation and partnership, but the point is to be aware of the potential difficulties.
The agreement should say who is involved in the practice, the nature of the business, the firm's name and its address. Typically, financial issues require the greatest care. The following are key:
It is not unknown for people to find they’re in a partnership without realising it, and this can bring unlimited financial liability
In addition to the above, an agreement should aim to protect partners, in particular new and retired ones, from unlimited liability and joint and several liability. In fact, all partners face unlimited liability, so it is vital to arrange insurance to cover employers' liability, professional indemnity and third-party liability.
The Professional Partnership Handbook, written by Smith & Williamson and published by Tolley, is available from Smith & Williamson (contact Heather Wilton on 020-8446 4371) or can be ordered from www.smith.williamson.co.uk.
Chris Pomroy is a partner in Smith & Williamson Chartered Accountants, specialising in business services.