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The Importance of Partnership Agreements

Thursday, June 16, 2016

We are often asked to advise people going into business for the first time, and whilst there is a wealth of information available on the internet, it is still something of a minefield for people wishing to set up a business.

The options are:

  • sole trader;
  • partnership;
  • a limited company; or
  • a limited liability partnership.

 Unless you are trading alone, partnership is likely to be your first choice.  In its simplest form, partnership is simply two or more persons carrying on a business which they will own, sharing the profit and working together for a common purpose.

Most people who set up a new business with someone else will start off as a partnership.

A partnership can come into being and continue without any formal agreement whatsoever.  This is called a partnership at will.  However, it is sensible for the partners to cover their agreements in writing and put into place a formal partnership agreement. This will not only determine what the arrangements are between the partners during the time that they are working together such as profit shares and  ownership of assets , but will also assist in establishing the position should the partners have a dispute, one wishes to retire or, very importantly, if a partner dies.

The partner who has died will sensibly have made a will appointing executors to deal with his estate.  Those executors will need to clarify the value of the partner’s interest in the partnership.  This can include a share of the profits up to the date of death, his share of the assets – properties, equipment, cash, intellectual property – and also, the most difficult of all things to value – goodwill. 

If the partnership agreement has been properly drafted it will lay down criteria for the valuation of goodwill and how this is to be paid to a partner’s estate on his death, so that the remaining partner(s) and the deceased partner’s executors can see exactly what the position is.  If, however, there is no partnership agreement then the position is not straightforward and disputes can arise.

Often when people are setting up businesses, they look to do so as cost effectively as possible, and one of the things they try and save money on is the partnership agreement.  Sadly this can often prove to be a false economy particularly in the event of a dispute or in the event of one partner dying or wishing to retire.  If in doubt, take advice and more importantly, speak to someone who has experience of dealing with these matters which, I am pleased to say we, at Rogers & Norton, do.

For further information, contact Richard Etheridge, tel no. 01603 675627, email: rwje@rogers-norton.co.uk or visit the commercial and business section on our website.