Running The Partnership Business

Partnership Agreement

Partnership
A ‘partnership’ comes into existence when more than one person carries on a business ‘in common with a view to profit’. It follows that charitable and non-profit organisations working together cannot be in a partnership – they are not in business to make a profit.

It is important to note that two sole traders that decide to work together will almost certainly form a partnership.

A partnership may exist before any partnership agreement is signed or stated to begin – on the basis that the partners are already working together with the aim of making a profit. For this reason, if a partnership’s business activity begins before the partnership agreement is signed, the partners may wish the agreement to include an indemnity to cover a partner for any liability arising in relation to a contract entered into for the partnership’s benefit before the agreement is signed.

A partnership has no separate legal personality which means that unlike a company or Limited Liability Partnership, a partnership cannot own assets itself. This means that all of the partnership’s assets must be owned by the partners. Unless the partners agree otherwise, each partner will own a share in the partnership’s assets and hold that share on trust for the benefit of the partnership (known as ownership in common).

The Business of the Partnership
A partnership agreement can set out the scope and extent of the partnership business. If the partnership wants to expand its scope or extent, it would need the consent of all of partners unless the partnership agreement says otherwise.

The partners may decide that they need an annual business plan. The partnership agreement can deal with this requirement and prescribe its contents, such as financial forecasts, budgets and accounting information.

Who can be a partner?
Partners can be individuals, companies or other legal entities.

Unless the partnership agreement says otherwise, the admission of a new partner requires the unanimous consent of the other partners. This may be too stringent a requirement for growing partnerships, a majority agreement or higher requirement short of unanimity may be more suitable. It may also be the case that partners investing significantly more into the partnership may want a greater say in the appointment of new partners.

Devoting time to the partnership and promoting its business
Unless the partnership agreement says otherwise, every partner has the right to take part in the management of the partnership business. This default position may not be suitable in the case of ‘silent’ partners who invest in the partnership, the other partners may not wish them to have a say in running the business.

Whilst the law would impose certain general duties on partners towards their fellow partners, a partnership agreement would usually clarify these obligations, including details of exactly how much time partners agree to devote to the partnership.