Time for a refresher?
Partnerships come in all shapes and sizes - deliberate and accidental or even just by nature alone! In which case how are they formed, how are the terms agreed and what is optional and what fixed by law? These and questions around joining, leaving, running and ending partnerships all call for careful consideration.
You may think you know the basics of what's involved, but with many businesses operating as partnerships, it may be time to revisit how your business operates and review the relationship within the internal environment as well as the external. When it comes to law firms which typically operate as partnerships, particularly small and medium sized firms, it may be time to review whether the documented intentions are still relevant in the wake of recent pressures faced by the profession and whether the business structure is adequate to cope in such changing times.
I will be going back to basics with a series of posts on Business Partnerships starting with what a partnership actually is and how it is formed.
What is a Partnership?
Very simply, partnerships are formed by two or more people who share a common view of profit. Unlike a company, partners are taxed individually on their partnership income, although the business has an entity as ‘a firm’. It does not have separate legal personality like a Company, nor does a partnership have to be formally formed. In fact, a verbal agreement can still constitute a partnership. They are therefore established by a contract, as long as two or more persons enter the agreement with a ‘common view of profit’, as defined by the Partnership Act 1890. However, where there is no formal contract, it will be left to the courts to determine what the intentions were rather than what has been formally agreed in a partnership deed. By having a formal contract, you will be ensuring the terms of your agreement are what you intend them to be.
And what about the default positions...?
An important point to note is that under partnership law, there are several default positions which we will be discussing in subsequent posts, the most important being equal profit sharing. If this is not what was intended, it needs to be expressly documented in the partnership agreement, otherwise equal profit sharing will be the default when any dispute arises. We will also be discussing several other relevant and sometimes alarming default positions which threaten the continuation of the business that can be expressly bypassed, by virtue of section 24 of the Act. We will also be discussing those issues which are not covered by the Act which you should expressly be including for the smooth functioning of the business and to limit the likelihood of disputes.
Basic Structure to Start
With formation out of the way, the structure of a partnership agreement should set out the business environment such as the name of the partnership business, the type of partnership, where the principal office is, purpose of the partnership, duration, financial input, bank, accountants and insurance. A good structure should include both the internal and external environment which governs the relationship between partners and also with the outside world and encompasses changes affecting the partnership.
In my next post I shall be introducing the issues which govern the internal relationship with regard to profit and loss, commitments, obligations, restrictions, management, disputes and entitlements.