A partnership arises where two or more persons own and run a business together, the business may involve any trade or profession. The London based law firm Slaughter & May is one of the larger partnerships with 113 partners at the time of writing.
A partnership is the relation which subsists between persons carrying on a business in common with a view of profit.Â The Partnership Act 1890 forms and governs partnerships and the definition above is taken from it. Due to the wide definition it is possible for a partnership to arise by accident or even without the partners knowing that they are in fact a part of a partnership.
However, a partnership may be also be governed by an agreement between the partners this agreement may be a spoken agreement but usually takes the form of a written document called a partnership agreement. In absence of an agreement the Partnership Act 1890 will be the controlling factor in relation to a number of issues, this can cause some problems.
For example profits and losses, in absence of an agreement The Partnership Act 1890 will imply a term that the partners will equally share all profits and losses. Partners may be happy with this, however if Partner A has put more money into the business than Partner B he may wish for a greater share of the profits. Therefore, they may draw up an agreement that allows Partner A 75% of the profits and Partner B 25%.
Issues can also arise in relation to work input, for example you may wish all partners to devote their time and effort to the management and running of the partnership. This would be a key point to include in a partnership agreement in absence of such a work input clause The Partnership Act 1890 will imply a term that all partners will take a part in the management of the business. This may not be satisfactory if you wish your partners to evenly contribute to the work load.
Another clause that may be beneficial to the partnership would relate to holiday entitlement, sickness and maternity. The Partnership Act 1890 is silent as to these so issues may arise in absence of such clauses.
Under the Partnership Act 1890 if one partner wishes to leave and the other partners wish to remain, the only option is for the partnership to be dissolved and a new partnership formed. Therefore, a beneficial clause in any partnership would allow for one partner to retire allowing a new partner or existing partner to buy their share of the partnership. Â Bankruptcy or death of a partner under the Partnership Act 1890 will also cause for the partnership to be dissolved, thus a clause that would allow a new or existing partner to buyout their share would be beneficial to the partners.
Drafting a partnership agreement can be beneficial to both the business and the partners, whilst the Partnership Act 1890 will form and govern the partnership in absence of an agreement. The Act may cause issues or an improperly thought out or drafted agreement may also cause issues too. Â It would always be advisable to have an agreement in place to cover all circumstances and factors that the business may encounter.Â