It’s not uncommon that when multiple business owners start out running a business together, they do so informally. It might be two friends launching a recruitment business or professional advisers joining forces to pursue a shared opportunity.
In the early stages, formal agreements can often feel unnecessary. Everyone gets along and the business is growing, so putting legal arrangements in writing can slip down the priority list.
However, this can expose your business to needless risk. Failing to put a partnership agreement in place can create significant problems further down the line. Without one, your business may be treated as a “partnership at will”, leaving important aspects of the relationship governed by default legal rules rather than arrangements tailored to your circumstances.
In this article, we explain what a partnership at will is, the risks it can create, and how these partnerships may be brought to an end.
What is a Partnership at Will?
A partnership exists where two or more people carry on a business together with a view to making a profit, other than through a corporate vehicle such as a limited company. For example, three people running a dog-walking business together could be considered a partnership, even if they have never formally described themselves as partners.
One partner does not need to be involved in every aspect of the business. For example, in a recruitment business, one individual may focus on placing candidates while the other manages marketing, finance and the website. If both are carrying on the business together with a view to profit, a partnership may exist.
Where partners operate without a written agreement and for an indefinite period, the arrangement will often be treated as a Partnership at Will under the Partnership Act 1890.
Why can a Partnership at Will be problematic?
The Partnership Act 1890 provides a framework of default rules that apply where partners have not agreed otherwise. While these rules may appear straightforward, they are rarely tailored to the realities of a modern business and can lead to unexpected consequences when disagreements arise.
A properly drafted partnership agreement allows partners to replace many of these default provisions with arrangements that better reflect how the business operates.
One partner cannot simply remove another
One common misconception is that a partner can be removed if they are no longer contributing to the business or if relationships break down. In a Partnership at Will, the position is often more complicated.
The Partnership Act 1890 does not generally allow one partner to expel another unless there is an agreement that specifically permits this. As a result, if serious issues arise between partners, the only option may be to dissolve the entire partnership.
Partnership assets may not be divided as expected
Many partners assume they have a direct ownership interest in partnership assets, such as equipment, property or goodwill. However, partnership assets don’t automatically belong to individual partners in that way. Where a Partnership at Will is dissolved, the assets must generally be realised, liabilities settled and any remaining surplus distributed in accordance with the partners’ profit-sharing arrangements.
Disputes often arise where one partner believes there was an understanding, whether express or implied, that assets would be divided differently. These disagreements can become particularly complex if they are not dealt with appropriately.
The death of a partner can automatically end the partnership
Another significant risk where a Partnership at Will is considered to exist is that in those circumstances where there is a death of a partner, this will usually result in the automatic dissolution of the partnership. At what is often already a difficult time, the partnership’s assets may need to be valued, realised and distributed in accordance with the statutory rules.
Without appropriate provisions in a partnership agreement, as a surviving partner, you may find yourself dealing with uncertainty and disruption at a critical point for the business.
There are no restrictions on departing partners
Partnership agreements often contain provisions that restrict outgoing partners from approaching clients, customers or suppliers after they leave the business. In a Partnership at Will, these protections don’t generally exist.
A departing partner may therefore be free to contact former clients or suppliers and establish a competing business. This can have a significant impact on the continuing business, particularly where the partners operate in the same market or geographical area.
Can a Partnership at Will be avoided?
In most cases, yes.
The best protection is a carefully drafted partnership agreement that clearly sets out how the business will operate and what happens if circumstances change.
A partnership agreement can deal with matters such as:
- Profit sharing arrangements
- Decision-making powers
- Admission of new partners
- Retirement and exit provisions
- Expulsion procedures
- Ownership of assets
- Restrictions on departing partners
- What happens on death or incapacity.
It can also provide certainty and help reduce the likelihood of costly disputes in the future. You should also review your agreements periodically to ensure they continue to reflect how the business operates. An outdated agreement can create uncertainty and may not provide the protection you and your partners intended.
How Gorvins can help
Whether you’re setting up a new business, reviewing an existing partnership arrangement or dealing with a dispute between partners, obtaining legal advice at an early stage can help protect your interests.
If you’re considering entering into a partnership, our Corporate Team can advise on the most appropriate structure and assist with drafting a partnership agreement tailored to your business.
Alternatively, if you’re involved in a dispute, considering dissolving a partnership or dealing with the death of a partner, our Litigation Team can provide practical advice and support.
To speak to a member of the team, call us on 0161 930 5151, email us at enquiries@gorvins.com or complete our online enquiry form.