Partnerships – what you need to know

The words “partner” and “partnership” are bandied around a lot in business. “X is my business partner”, “Y and I are doing this work in partnership” – but what does it really mean to be in a partnership?

A partnership is defined as “two or more persons carrying on a business in common, with a view to a profit”. To break that down into parts:

• • there must be more than one “person”. This can be confusing, because e.g. a company can count as a “person” in this context;
  • “carrying on a business” includes preparatory steps – so, for example, if two people planned to open a restaurant in partnership but only got as far as kitting out the premises before splitting, that would be enough for a partnership to have been formed;
  • there only has to be an intention to make profit – it is irrelevant whether any profit is actually made.

Partnerships are very common in certain industries – for example agriculture, medicine and dentistry. Other industries (including legal and accounting) still often use the term “partner”, but usually they are a different form of business – either a company or an LLP. Equally, it is quite possible for people to end up in a partnership by accident – if you meet the definition above and have not set up a different arrangement, then you may have formed a partnership without even knowing it.

There are several important differences between a partnership, and a company or LLP. Probably the three most important are:

• • lack of legal personality: so, in other words, a partnership cannot sue or be sued, cannot sign contracts and cannot own property – a company or LLP can do any of those things;
  • joint and several liability: in most cases, the default position is that each of the partners can be pursued for 100% of any liability incurred by the partnership business – it is then up to that partner to pursue a contribution from the other partners. This can cause major problems where e.g. one of the partners becomes insolvent;
  • taxation: tax advice is outside my remit, but suffice to say that the tax arrangements are very different for those in partnership as opposed to those forming a company or LLP.

Partnership Agreements

I am often asked if it is necessary to have a written Partnership Agreement. The answer is always 100% yes! It is very unlikely that the underlying law will match your intentions for the partnership arrangement exactly, because that is individual to your business. If there is any dispute or disagreement, it takes an enormous amount of time and legal cost to unpick matters where there is no Partnership Agreement, because the position at law usually does not suit any of the partners. For example, if you have no Partnership Agreement then the default position is that any of the partners leaving triggers the winding up of the partnership – not usually the intention!

A key follow-on point is the importance of updating a Partnership Agreement when a partner joins or leaves, or other significant changes occur. I have seen countless Partnership Agreements that, when I look at them, bear no resemblance to the partners actually remaining in the business. You also need to consider other changes to be made at the same time – for example is there a lease of partnership premises in the previous partners’ name? Again, it can become very expensive and time consuming if these matters are left until there is a dispute.

If you would like to talk about your Partnership Agreement, or any other matters relating to your partnership arrangement, then please give me, Euan McLaughlin - Partner Commercial Department, a call or send me an email.