Partnerships

You want something in writing in place, in case you should fall out

It is a fact of life that people do fall out. This is especially true in business. Over 80% of the Partnership Agreements, which we drafted before 1993, were for partnerships that are no longer in existence. The partners have gone their separate ways, either amicably or otherwise.

The purpose of putting an agreement in writing now, while you and your potential partner(s) are able to talk about matters, is to set a frame-work for that time when you are not able to discuss matters so impartially with each other.

For this reason, we usually cannot represent both [or all] parties, as otherwise we lay ourselves open to the criticism by the one of you that the Partnership Agreement, drafted by us, favoured the other(s).

It might be that if both [all] of you are of similar age and are putting in similar amounts of money and effort, then one [or more] of you might not feel you need to be represented on the basis that you are all being treated equally.

If, however, ages or input are dis-similar, I can however refer your potential Partner(s) to a solicitor, who will be able to safeguard his (their) position and negotiate on his (their) behalf in respect of the Partnership Agreement.

The potentially difficult situation

Assume that the business has been trading for a number of years and has been successful [obviously you are not going to get into an argument about a worthless business]. Assume further that the last few years have shown healthy profits and the partners have been drawing at a level that they are happy.

Something then occurs which puts you in a situation, where your interests conflict. One of you may die , get very ill and be unable to work or simply feels that he cannot continue in the business ("the Outgoing Partner")

The other partner ("the Remaining Partner") is left behind to cope with all the problems of running the business and feels upset/bitter. What are the financial arrangements to be between you (or your respective estates)?

No partnership agreement

This section concentrates not on the desirability of having a partnership agreement, but on the legal position where there is no agreement. The relationship between the partners is governed by the Partnership Act 1890. Because of the age of this legislation, it may be thought that some provisions are not realistic in this day and age. However, they will still apply and this is one of the penalties of not having a written agreement.

Any partner may dissolve the partnership upon giving notice. This need not be in writing and can take effect forthwith. The immediate effect is that the partnership business cannot be continued, save for the purposes of winding-up the partnership. Each partner has a duty to carry on the affairs of the Partnership for the purposes of winding-up the business, but no further.

No partner is entitled to a salary for winding-up the partnership affairs. Often, especially in the case of a two-man partnership, one effectively leaves and the other one is left with all the work. The Remaining Partner is not entitled to a notional salary.

The partners or any of them could apply to the Court for the appointment of a Receiver to manage the business affairs and that Receiver would be entitled to a salary, but many people are reluctant to take this course of action as it necessarily incurs further expense at a time when no doubt the resources are slight.

The partners are entitled to their capital accounts immediately. A written partnership agreement might provide that these should be paid over a number of years, rather than all in one lump sum that could cause hardship.

In the absence of a stipulation to the contrary, if one partner continues with the business and carries on dealing with the clients and the customers then goodwill is, in theory, payable. A lot depends upon the nature of the business and of course its turnover and profitability. If the business provides a very personalised service and location of the offices are not relevant then the figure for goodwill may be nil or at least certainly lower than for, say, a shop in the High Street, where there is passing trade.

Don't just slide into what could become a messy situation in the future, call us...

Partnership disputes

We have also had to litigate both written and unwritten Partnership arrangements, when the Business Participants have decided to go their separate ways, amicably or not so amicably, negotiating a tax efficient and cashflow-acceptable settlement for the client (whether the outgoing partner or the remaining one)

Features of the disputes have included family emotions and interference, a large amount of indebtedness, disputed valuations of assets, manipulation of financial figures, fraud

Various cases have involved a well-known footwear manufacturing business, a firm of estate agents, a vets practice, a petrol station chain, a nursing agency, a mobile telephone distribution service and many others.