Three key reasons why you should have a partnership agreement in place
If you are entering into a partnership or you are a partner of an existing partnership then having a Partnership Agreement in place is strongly recommended. However, often partnerships do not have one in place as it is not a legal requirement to have a Partnership Agreement. This results in the default position of the partnership being governed by the Partnership Act 1890.
In the absence of a Partnership Agreement there can be uncertainties as to the relationship between the partners and the position under the 1890 Act. This can often be outdated and incompatible with how modern businesses operate.
Danielle Austin explains three important reasons why you should consider having a Partnership Agreement in place:
- The default position under the 1890 Act is that all profits and losses of the business are shared equally between the partners. This is regardless of the time each partner dedicates to the business or the revenue that they bring in. A Partnership Agreement can provide how profits and losses are to be shared including if they are to be split differently between the partners.
- The 1890 Act does not place any restrictions on partners leaving the partnership. Therefore, there is nothing preventing an outgoing partner from working for a competing business or contacting customers, suppliers or employees of the partnership. A Partnership Agreement can place restrictive covenants on outgoing partners to protect the interests of the business of the partnership.
- The 1890 Act provides that if a partner retires, dies or is made bankrupt then the partnership automatically dissolves. However, a Partnership Agreement can include provisions for when a partner retires or otherwise and provide how that partner’s share of the partnership is to be dealt with.
Having a clear agreement in place between partners will help lead your business down a path of success and you can agree your own rules rather than relying on the default rules in the 1890 Act.