Why have a partnership agreement?

This post covers the reasons for having a partnership agreement if you’re thinking of setting up in business with someone.

partnership agreement

You have just gone into business with your best friend whom you’ve known for years. As you trust him implicitly is there any real need for any partnership agreement? 

If there's no formal partnership agreement then your business will be bound by the terms of the Partnership Act of 1890. Whilst it’s reasonably straight-forward, it was written over a 100 years ago. Because of this, it may not be entirely relevant in today’s business climate.

What details should you include?

Basically it should set out the rules determining how the partnership should operate. For example how the partnership assets are divided when the partnership comes to an end.

If there is no agreement in force there will be uncertainty and if the Partnership Act of 1890 is applied this could well lead to unfavourable results.

Whilst not essential, it's sensible to have a partnership agreement prepared by a solicitor. However think carefully about what should be included. We’ve set out below the key points for consideration:

How the business is run.

This covers the day to day operation of the business and should cover the following:

  • Partner’s duties (who does what)
  • Working hours (and holidays!)
  • Decision-making procedures (who decides what)
  • Business premises (where the business operates from)
  • Cars - for example should they be owned by the partnership as a whole or personally by the individual partner?

Financial matters

This can be a prickly subject if not covered properly (as accountants we would say this!). It should cover these matters below:

  • Profit (loss) sharing arrangements and drawings on account (how the money is divided up)
  • Partnership capital and interest arrangements (how much each partner invests in the business and what interest, if any, they are paid on their investment)
  • Banking and financial arrangements (who the business banks with)
  • Accounting arrangements (who acts as accountants for the partnership!)

Special circumstances

This part of the agreement will cover the arrangements in place should a particular set of circumstances arise. 

  • Partner retirement procedures (what happens when a partner retires)
  • Death of a partner (what happens when a partner dies)
  • Providing for partners’ retirements and dependants (how the partner and their family will be provided for on retirement of the business)
  • Disability of a partner (what happens if a partner is unable to continue in the business due to ill health)
  • Establishing the right to expel a partner (how to remove a partner)
  • Arbitration for unresolved disputes
  • Business valuation procedures (for example in the event of a sale of the business)

What about registering the partnership with HM Revenue?

You must register the partnership or individual partners by 5 October following the tax year it commenced. If you fail to register on time you could be liable to a penalty.

For example if you start your partnership in August 2020 - the 2020/21 tax year you must register the partnership by 5 October 2020.

To register the partnership for self-assessment, you can choose a ‘nominated’ partner to either: register online (limited liability partnerships can’t use this service).

Alternatively you can download and fill in form SA400. When the nominated partner registers the partnership they should register themselves for Self Assessment using form SA401 (if they’re an individual) or SA402 (if they’re a company, or trust for example).

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

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