Whatever the size of your business, if you operate as a partnership or LLP you should have a members’ or partnership agreement in place to protect all parties. Our team are happy to help with this and offer regular reviews to ensure you’re fully compliant with the latest changes in the law. We’re also on hand with practical solutions and advice should any issues occur during the lifetime of the partnership or LLP.
What is a partnership?
The Partnership Act 1890 defines a partnership “as the relation which exists between persons carrying on a business in common with a view to profit”. Consequently, whether a partnership exists is a matter of fact. Merely labelling a business relationship a “partnership” does not create a partnership in law if there is no business being carried on “in common with a view to profit”. A partnership comes into existence through a continuing relationship. The courts will consider the substance of the arrangements and not just the stated intentions of the parties when considering whether a partnership is in existence.
It is important to note that a partnership has no separate legal identity, it is the collection of its partners. Partnership contracts are made with the partners who have joint and several personal responsibility for the partnership’s liabilities. The acts of one partner, in the name of the partnership, will be binding on all of the partners.
Partnership agreements – unincorporated partnerships
The law surrounding unincorporated partnerships can be complex and can become problematic if you do not have an appropriately drafted and up to date partnership agreement. Without a partnership agreement, your partnership will be governed by the Partnership Act 1890, which is unlikely to reflect the terms you want to apply to your partnership. For example, the Partnership Act:
- assumes equality of capital contributions and sharing of profits and losses.
- assumes that all of the partnership’s assets have been contributed by and belong to the partners equally. This is often not the case in practice but you need a partnership agreement to avoid these terms being implied.
- contains a number of provisions concerning the running of the partnership that will be implied in the absence of express provision to the contrary.
- is limited in scope and treats all partners equally.
- is outdated and therefore does not meet the needs of modern business practices regularly used in partnerships today. For example, it allows a partner to dissolve the partnership at any time, triggering significant and unwanted liabilities and tax consequences for the partners and the business.
In addition, in the absence of a partnership agreement, disputes may arise over ownership division, the roles and responsibilities of the partners and the division of assets upon termination of the partnership.
Our specialist team’s extensive knowledge and experience of partnership law and drafting partnership agreements is invaluable to resolve and prevent any issues that may occur throughout the life of the partnership, including dissolution and throughout disputes.
What is a Limited Liability Partnership (LLP) and how is it different to a general partnership?
LLPs are effectively incorporated partnerships established under the provisions of the Limited Liability Partnerships Act 2000 (LLP Act). An LLP has many of the features and flexibilities of a partnership but there are two very significant differences:
- An LLP is a corporate body with a separate legal identity. It can enter into contracts in its own name;
- An LLP has limited liability. The liability of the LLP’s members is limited to the amount of their capital.
Members’ agreements – LLP
An LLP must have a minimum of 2 members. As with a general partnership, the members of an LLP should have a members’ agreement that governs their roles, responsibilities and entitlements as members of the LLP. The LLP Act states that the mutual rights and duties of an LLP and its members are governed by an agreement between the members or, in the absence of an agreement, by the LLP Regulations 2001).
Without a members’ agreement, your LLP is governed by the default provisions of the LLP Regulations, which are unlikely to reflect the terms that you want to govern your LLP. For example, the default provisions of the LLP Regulations in respect of capital contribution and entitlement, profit sharing and decision making are unlikely to reflect the terms that you want to operate in practice.
How our partnership lawyers can help
Our specialist commercial lawyers have experience in all areas of partnership agreements and members’ agreements including drafting bespoke agreements and offering regular reviews to ensure you are fully compliant with the latest changes in partnership law.
We advise on all areas of any partnership or members’ agreements, including:
- financial provisions;
- Decision making;
- Financial reporting;
- Resolving disputes; and
- Procedures for appointment and retirement of partners.
Frequently Asked Questions
The short answer to this question is yes. It is extremely important to have a partnership or members’ agreement. Without a partnership or members’ agreement, your partnership will be governed by the Partnership Act 1890 (“the Act”) or your LLP will be governed by the LLP Regulations, neither of which are likely to reflect the terms you want to apply to your partnership or LLP. The Act and the LLP Regulations are limited in scope and treat all partners/members equally. The Act is also archaic, due to its age, and therefore does not meet the needs of modern business practices regularly used in partnerships today.
Whilst the content of a partnership or members’ agreement differs for each partnership or LLP, there are certain factors that should always be contained within a partnership or members’ agreement. These include: financial provisions; decision making, roles, financial reporting, entitlements, duration, resolving disputes; and procedures for appointment and retirement of partners/members.