If you go into business with someone else, you will usually have established a partnership, whether or not you have put this in writing. By signing a formal partnership agreement, you can set the ground rules for your relationship and avoid misunderstandings and disagreements in the future.
Is a partnership agreement essential?
While it is not essential to have a written partnership agreement, if you do not, then the terms of the Partnership Act 1909 (the Act) will apply by default. Some of the provisions of the Act will not necessarily be what you might have chosen and can have onerous consequences.
For example, where the Act applies, all partners will be jointly liable for the partnership debts or wrongful acts of any of the other partners, all partners will have an equal say in making business decisions, no partner can be expelled from the partnership and any partner can end the partnership at any time.
This risks paralysing the partnership if agreement cannot be reached and also means that there is an ever-present risk that one partner could simply choose to end the partnership.
By having a bespoke partnership agreement drawn up, you can tailor the provisions to suit your specific circumstances and try to put provisions in place to avoid disputes.
Key clauses for partnership agreements
The partnership agreement should accurately reflect your wishes for the business. Going through the process with your partners of deciding what you want included and how you want matters arranged will help you ensure that you have properly considered and agreed all aspects of your partnership.
Some of the main clauses that are usually written into a partnership agreement include the following:
• Who owns which assets;
• Who has authority and who is responsible for each type of decision;
• Allocation of profits, losses and liabilities;
• Who will be liable for a decision which leads to a loss?
• How can a partner leave or be asked to leave?
• How can a new partner be added?
• Who needs to authorise or agree the borrowing of money?
• What salaries or other reimbursement can be taken by partners?
• Who can call a meeting and how many partners need to be present to make a decision?
• Non-compete clauses;
• An agreed procedure for dispute resolution.
While there are many details to work through before a partnership agreement can be drafted and signed, by putting a robust framework in place at the outset, a partnership stands the best chance of success.
The types of partnership
As well as deciding on the provisions of any agreement, you will also need to decide on the type of partnership which is best suited to your needs.
A general or conventional partnership allows partners to co-own a business and they will be personally responsible for the liabilities and debts of the partnership.
A limited partnership has one or more general partners and one or more limited partners. The liability of the limited partners does not exceed the amount they have invested, while the general partners will be fully liable for all of the partnership liabilities and debts. These can also elect to have a separate legal personality from its members, simplifying ownership of property in the event of a change of partner.
A limited liability company, often referred to as an LLC, can limit the partners’ financial responsibility. (These are known as Limited Liability Partnerships in the UK.)
It is advisable to take legal advice about which type of partnership would best suit your requirements as well as in respect of the contents, to ensure that you have the right framework in place for your business.
At Quinn Legal we have extensive company and commercial knowledge. If you are considering entering into a partnership on the Isle of Man, we can advise you on the process and ensure that all of the necessary documentation is in place setting out the details in full.