A partnership is essentially a business run by two or more people with a view to making a profit. Unlike an incorporated company it is very simple to set up a partnership. In fact a partnership can be formed by an oral agreement between the parties without any paperwork involved. Indeed, many people do not realise that by going into business with someone else they are effectively setting up a partnership. However, it is a fact of life that people will have disagreements and some will eventually fall out.
If the parties have entered into a partnership without a formal partnership agreement having been drawn up then any dispute between the partners will be dealt with under the Partnership Act 1890. However, compared to a detailed partnership agreement, the Act can be somewhat lacking in its provisions as it only covers the bare essentials of a partnership. For example, there is no provision within that Act for removing an errant partner. This therefore means that in the event of a dispute where there is no partnership agreement setting out a procedure for resolving that dispute, the partnership would have to be dissolved.
Dissolution of the partnership could be very disruptive to a business as the partners would have to deal with the repayment of partnership debt as well as facing the potential of a protracted dispute amongst themselves regarding various partnership issues.
By contrast, a properly drawn up partnership agreement can specify what should occur in certain scenarios and what is expected of each partner within the partnership. For example, if a partner was to leave the partnership, the partnership agreement could stipulate the circumstances in which the departing partner could withdraw his capital from the partnership, the payment of his share of the partnership debt as well as determining what are personal and what are partnership assets. The partnership agreement could also deal with the introduction of new partners to replace departing ones. Further, a partnership agreement will normally have a mechanism setting out the circumstances as to when a partner can be removed and what should happen to his share of partnership assets and the payment of partnership debts. There could also be provisions which allow a partner to be bought out by the remaining partners with a detailed mechanism for valuing the outgoing partner’s share of the partnership.
Properly drafted partnership agreements can prevent disputes from arising as they will detail the rights and obligations of the partners in any dispute. Where disagreements do arise the partnership agreement can provide a mechanism to resolve those disputes. A partnership agreement can therefore provide a clear framework for resolving any issues that arise between the partners. The time and expense incurred in having a proper partnership agreement prepared will far outweigh the time, cost and stress which would be spent in dealing with a partnership dispute without such an agreement.