Solicitor Anne Phillips on the importance of partnership agreements and what steps to take in the absence of one
The Partnership Act 1890 describes a partnership as a relationship which exists between two or more people carrying on a business with a view to profit.
There are many daily situations where a business partnership comes into existence, even without the knowledge or intention of the parties.
For example, if two or more people decide to actively carry out business activities together but do not incorporate the business as a limited liability company, they are operating under a partnership, whether they realise it or not.
So why is a Partnership Agreement important?
Well, a written partnership agreement sets out the terms and conditions under which the partnership and the relationship between the partners will work.
A partnership agreement will typically include clauses relating to: the duties of each partner; the distribution of profits and losses; the term of the partnership; what happens if a partner leaves/wants to retire/dies, and how the partnership can be terminated.
But what happens if no partnership agreement is in place?
Well, if no written partnership agreement is in place, the default provisions of the Partnership Act, 1890 will automatically apply. Examples of such provisions are:
Profits must be shared equally between all partners; No partner is entitled to remuneration for acting in the partnership. Instead, partners are
entitled to share in the profits of the business; There is no provision for the retirement of a partner or to prevent a former partner
competing with the firm after they leave; There is no right to expel a partner irrespective of that person’s conduct; If a partner dies or becomes bankrupt, the partnership is automatically dissolved.; Any one partner can dissolve the partnership at any time simply by giving notice at a partner’s meeting.
In most cases, these default provisions are regarded as inappropriate and restrictive for most modern partnerships. So, if you are involved in a business with one or more other persons and have not formed a company, you should take legal advice to determine whether you are actually trading as a partnership and, to avoid being held ransom to the provisions of the Partnership Act, 1890, enter into a written partnership agreement, tailored to the specific needs of the business which can exclude these provisions and apply more appropriate terms.
It goes without saying that a written partnership agreement should be entered into at the outset of the relationship as this will help avoid unnecessary problems and unhappy individuals if matters come to a head for whatever reason.
This article is for general information purposes only and does not constitute legal or other professional advice. We recommend seeking legal advice to interpret and advise on any aspect of the law. For complete article, please see www.wolfe.ie