A partnership agreement is an agreement between the partners of a business. There is no requirement that a partnership agreement must contain certain information or deal with certain issues.
The general law will impose a default set of obligations and rights on partners if there is no formal agreement. However, the default rights and obligations are generally seen as unsuitable and not extensive enough to govern a modern partnership business.
A typical partnership agreement will have the following aims:
- to describe the intention of the partners for the partnership business,
- to record and govern the relationship between partners,
- to help protect sums invested by partners in the business,
- to protect any individual partner’s property which is to be used by the partnership business, and
- to promote the smooth running of the partnership business.
In order to meet these aims, the partnership will require a comprehensive partnership agreement containing specific provisions to meet all of the above aims.
The key provisions in any partnership agreement are arguably those that govern:
- The admission and exit of partners
- Capital/property invested by partners
- Income/drawings from the partnership
- Partnership decisions
A partnership agreement will usually set-out the criteria for the admission of new partners, circumstances in which a partner may voluntarily leave the partnership, and situations in which they are forced to leave.
These provisions are particularly important where partners invest different amounts of capital into the partnership or allow the partnership business to use property which belongs to them.
The partnership agreement will normally regulate how profits and losses are shared between the partners, and how income may be drawn by partners during the year. This may be based on a number of factors such as the capital, property and time invested by a partner.
These provisions regulate decisions regarding the partnership and its business, including the liability of the partnership in relation to commitments made by individual partners.
The rest of this guide sets out the contents of a partnership agreement in more detail, including those outlined above.