Ordinary partnerships are governed by The Partnership Act 1890 and in the absence of a partnership agreement, the outdated unsuitable default rules would apply.
You may not even realise that you are a running a partnership which is defined by s1(1) of the Act “persons carrying on a business in common with a view of profit", however if this is fulfilled then a partnership exists in law whether or not that was your intention.
In the absence of having a formal written partnership agreement the consequences can be disastrous.
- Duration - If there is no fixed term agreed it is known as a partnership at will, s26 states that it can be dissolved at any time and s33 automatically dissolves upon death or bankruptcy.
- Financial Input - Act states that any capital contribution was done so equally, if not it is important to be clear so each partner owns the capital in proportion to those contributions.
- Shares in Profit - Partners entitled to equal share of profit unless otherwise agreed. Maybe the partners have different skills or hours they work?
- Income and Capital Profits - PA 1890 does not distinguish between the two, include the express provisions to ensure they are dealt with correctly.
- Losses - PA 1890 states losses are allocated equally, this might not be the case if different capital contributions
- Profits shared - Express provisions apply as this is not discussed in the Act. How will this be decided?
- Ownership of Assets - Some equipment may belong to individuals so this would need to be expressly stated. Otherwise it becomes an asset of the partnership.
- Work Input - PA 1890 does not impose any obligations on the parties, whilst a partner cannot neglect they can do as little as they feel necessary. Your partnership agreement should discuss expectations, holidays, sickness and whether there are any restrictions on working for another business.
- Decision Making - s19 requires agreement of all parties to make decisions. If there are more detailed rules they need expressly agreeing.
- Partners Authority - This area is complicated but your agreement should discuss who has authority to bind the partnership and enter into contracts.
- Expulsion - s25 no partner can be expelled unless an agreement states otherwise. Provisions are needed to ensure the partnership runs smoothly without any bad eggs.
- Payment for an outgoing partner's share - decide how this will be valued.
- Non-competition - unless any express restrictions partners are free to do whatever they choose.
Ensure that your business has a partnership agreement to regulate the business as time goes on. By not doing so, you run the risk of losing everything you have been working towards and being involved in a very messy divorce.
