Home start-ups and small businesses are on the increase and, in some cases, are growing and expanding into very successful enterprises. What is often overlooked, especially when the business is started by close friends or family members, are the legal issues. The idea of seeking legal advice can be seen as too formal or an unnecessary expense.
What is not understood is that when two or more people come together for a common purpose in business, then in the absence of a written partnership agreement or deed, in legal terms, this is known as a Partnership at Will. If relations sour or things go awry, a Partnership at Will means that any dispute is governed by legislation dating back to Queen Victoria’s reign – the Partnership Act 1890.
Whilst there are many things we may wish to thank the Victorians for, most of us do not want our business arrangements in the 21st century, dictated to by a law that is 127 years old.
Under the Partnership Act 1890:
- There is no general right for a partner to ever retire from the business. However, any partner can serve notice to dissolve the partnership and no reason needs to be given. Serving a dissolution notice could have disastrous consequences such as the sale of the partnership’s assets and property
- If a partner dies or is made bankrupt the business is dissolved
- Regardless of the level of individual involvement in the day-to-day management, profits and losses are assumed to be shared equally.
Partnerships at Will are inherently unstable structures and so having a partnership deed is nearly always the preferable option. In brief, a partnership deed is a written agreement between the partners of the business and sets out the rights and responsibilities of all those involved. It will cover such matters as:
- Ownership – if the partners have an equal share
- Control – whether one partner can make decisions alone or if some decisions such as incurring a certain level of expenditure, must be joint
- Roles and responsibilities – what contribution either in terms of time and/or money each partner is expected to make
- Profits – how these should be shared
- Liabilities – if the partners are responsible for these in the same ratio as the profits which may not be the case for example, if one partner is an investor
- Termination – in what circumstances the partnership can be dissolved and wound up
- Exit terms – when partners can exit the business and what happens when they do
- New partners – in what circumstances a new partner can join and on what terms.
There are many reasons why a business should have a partnership deed
- avoidance of conflict in the event of a dispute arising
- clarification of an individual’s duties and responsibilities
- stability which may also be important if investment is required
- protection for those involved in the business
- evidence of good working practice.
However, it’s not just start-ups and small businesses that default to a Partnership at Will arrangement - many professionals run their businesses without a partnership deed and hence, as a Partnership at Will.
Even a partnership which is governed by a deed should review the deed at least annually to ensure it correctly reflects what the business is doing and that the business and the deed comply with current legislation. There are specific circumstances where a review is essential including:
- Change in profit shares
- A partner retiring
- A new partner joining
- Sale of partnership assets such as the premises.
Partnership deeds can, in many cases, avoid a conflict arising, but if there is a dispute, the cost to resolve it can be several times greater when there is no partnership deed in place. Most importantly, it gives the partners choice on how they wish their business to be conducted, and means they will not be dictated to by a Victorian statute.
Please note that advice given in relation to this topic involves the referral to a service that is separate and distinct to those offered by St James’s Place.