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Statue of Queen Victoria

Hard times

03 August 2017

Without the right agreement in place, a Victorian law could dictate the future of your business.

Understandably enough, couples preparing to marry often feel uncomfortable about signing a ‘prenup’ – despite the potential costs and stress of reaching a divorce settlement without one.

Partners of new businesses can feel a similar discomfort over signing a partnership deed – but the potential cost of forgoing one is arguably even greater. If two or more people come together for a common purpose in business, but do so without a written agreement, then in the eyes of the law their association is a ‘partnership at will’. Should relations within that partnership later deteriorate, any dispute is then governed by legislation dating back to Queen Victoria’s reign: the Partnership Act 1890.

Some of the act’s clauses are potentially punishing in their implications

  1. If a partner chooses to serve notice, he/she can do so without reason, with the result that the partnership is automatically dissolved. The consequences of dissolution can be disastrous, potentially requiring the sale of the partnership’s assets and property.
  2. If a partner dies or is made bankrupt, the business is dissolved.
  3. Irrespective of who manages the business day-to-day, profits and losses are assumed to be shared equally.

Home start-ups and small businesses have been on the increase in recent years and have become an increasingly important part of the UK economy. A report published in 2015 found that high-growth small businesses (HGSBs) accounted for around 20% of the country’s economic growth at that time and created one in three jobs in 2014 – even though they represented less than 1% of the 5.3 million companies in the country.1

Yet the small scale of such companies generally means that in-house legal expertise is limited, while obtaining professional external advice constitutes a major cost. Be that as it may, the cost of remaining a partnership at will could prove to be far greater.

Drawing up a written partnership agreement or deed is a measure that can prevent all kinds of problems further down the line. Whereas partnerships at will are inherently unstable structures, a written partnership agreement sets out the rights and responsibilities of those involved, providing the clarity that business owners need.

A partnership deed can prevent conflict when a dispute arises. On a more day-to-day basis, it also provides stability, which can be crucial to winning investment or deploying it effectively. It also has the merit of clarifying the duties and responsibilities of different individuals in the business, while providing evidence of good working practice. In short, it should benefit not only your business but all those with a stake in its success.

Partnership deeds cover a range of areas, including:

  • Ownership: how much each partner owns.
  • Control: who needs to sign off on decisions.
  • Role and responsibilities: how much time/money each partner must contribute.
  • Profits: how these will be shared.
  • Liabilities: relative responsibility of partners (if different from profit ratios).
  • Termination: in what circumstances the partnership can be dissolved and wound up.
  • Exit terms: when partners can exit the business and how it works.
  • New partners: in what circumstances a new partner can join and on what terms.

Finally, a partnership that has drawn up its own deed still needs to monitor whether it remains fit for purpose, ideally at least once a year. Both the business itself and the legislation that governs it are subject to change, meaning that a partnership deed should not merely be left on the shelf and forgotten about once it has been agreed. In fact, there are certain circumstances in which a review is essential, such as when there has been a change in profit shares, when a partner retires, when a new partner joins, or when partnership assets (such as property) are sold off.

However, the most important step is the first one. Obtaining a partnership deed can ensure your business avoids suffering the worst exactions of a 19th century law.

 

1. Octopus High Growth Small Business Report, 2015, accessed 3 August 2017

Partnership agreements involve the referral to a service that is separate and distinct to those offered by St. James's Place and are not regulated by the Financial Conduct Authority.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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