Starting your business with a strong partner can make all the difference to your success. If you’re ready to join the 356,000 ordinary partnerships in the UK, or want to work with a partner under another form, read on to learn how a Business Partnership Agreement can underpin your future together.
In this guide, we’ll cover how to create a business partnership agreement and the common questions you’ll need to consider:
- What Is a Business Partnership Agreement?
- What Happens if You Don’t Have a Partnership Agreement?
- How to Write a Business Partnership Agreement
- Is a Partnership Agreement Legally Binding?
- Can a Partnership Agreement Be Modified or Changed?
- Finding Legal Support for Your Partnership Agreement
1. What Is a Business Partnership Agreement?
When you go into a business venture with another person, a Business Partnership Agreement is a legal document that sets out how you want the relationship to work. The agreement states key details such as:
- How is profit shared?
- How are any losses shared?
- How much capital will you each contribute?
- How are decisions made between you?
- How will you resolve a dispute if it comes up?
- What happens if a partner decides to withdraw or retire?
While you’ll likely have chosen a business partner you trust deeply, writing a Business Partnership Agreement from the start is like an insurance policy in case of any disagreements in future. It’s also a useful way to make important decisions about your partnership in advance, rather than trying to settle issues later in the heat of the moment.
Do Partnership Agreements Need to Be In Writing?
In the UK, oral Partnership Agreements are recognised as valid. However, we recommend a written Partnership Agreement as it gives you and your partner more clarity.
In the worst-case scenario, if you and your partner were to go to court later on, a written Partnership Agreement would also offer a much faster resolution. Otherwise, a judge might need to go through witness statements and texts to verify your oral agreements: a process that can be both costly and stressful.
2. What Happens if You Don’t Have a Partnership Agreement?
If you don’t have a Partnership Agreement and decide to build a business with your partner, uncertainty could undermine your relationship. Without an agreement, the default position is the Partnership Act 1890 governs the Partnership and disputes with the Partnership. This can be far from ideal as the Partnership Act 1890 is somewhat limited in scope. A Partnership Agreement therefore can ensure you have rights and remedies that otherwise would not exist.
For example, in many partnerships, one partner may invest more capital, expertise or time into the venture. Without a Partnership Agreement in place, this partner would not be entitled to a greater share of the business’ assets or revenue. Instead, they would be shared equally between each partner, regardless of contribution.
Furthermore, when the terms of your partnership aren’t clearly laid out, disputes can arise between partners. One of the advantages of a Partnership Agreement is that it can provide processes for resolving any disagreements between partners without the need for commercial litigation.
If I’m Starting a Business With a Friend, Do I Still Need a Contract?
While a lot can be done on a handshake, we still recommend a Partnership Agreement when starting a business with a friend or family member. Indeed, the more the relationship means to you, the more important it is to protect it by ensuring clarity as you start your new venture.
Watch Ben Jenkins, our Head of Commercial Litigation, explain why it is so important to protect both you and your business, even in commercial agreements with friends.
3. How to Write a Business Partnership Agreement
When creating your Business Partnership Agreement, here are nine areas you and your partner may need to consider and include:
- The structure of your partnership, whether a general partnership, limited partnership, limited liability partnership or other form.
- The individual responsibilities, percentage ownership and tax liability of each partner.
- Clearly state what capital each partner is contributing and how any profit or loss from the partnership will be shared.
- Define how you will make decisions, for example, whether by a majority vote, requiring unanimous consent or giving authority to specific partners in different areas.
- In the case of a partner leaving, retiring, or the partnership ending, specify how you would work through this and how any assets or liabilities would be shared.
- Outline a process for resolving any disputes between the partners, for example, choosing mediation or arbitration as alternatives to commercial litigation.
- Add in any necessary confidentiality or non-compete clauses to protect the business from partners directly competing or disclosing sensitive information.
- Specify the ownership of intellectual property rights, whether existing or future.
- State the governing law and jurisdiction for the agreement and for any disputes that may arise, whether the laws of England and Wales, the laws of Scotland, or those of Northern Ireland.
When it comes to writing your Business Partnership Contract, we recommend working with a solicitor to make sure your agreement is legally robust, clear and usable. At Harding Evans, we offer commercial services and thoughtful guidance tailored to your business.
4. Is a Partnership Agreement Legally Binding?
Yes, a Partnership Agreement is legally binding as long as it’s properly executed. Once every partner signs and dates the document, the contract is complete.
Going forward, the Partnership Agreement will provide legal protection to all partners, with the terms of your relationship clearly stated and mutually agreed. Again, this is why bringing in support from a solicitor to help you draft the agreement is so important. Creating contracts is just one of the five ways commercial solicitors can help your business.
5. Can a Partnership Agreement Be Modified or Changed?
Your Partnership Agreement can be modified or changed as long as all the partners agree. If this is the case, you’ll need to follow the process you’ve outlined in your agreement. If you haven’t specified this, changes will need to be made according to UK law.
This will usually mean documenting written consent from each partner and the changes being made to the agreement by issuing an amendment. At this point, it’s worth asking for guidance from your commercial solicitor to ensure the new document is legally sound.
6. Finding Legal Support for Your Partnership Agreement
If you’re considering going into business with a partner, we hope this guide has given you a foundational understanding of how to create a business partnership agreement.
While drafting the agreement may seem daunting, taking the time to create a robust contract will serve you well. You’ll be able to focus on building your business going forward, safe in the knowledge that the terms of your working relationship are clear, your interests are protected, and you have solutions in place in case disputes do occur.
Whether you’re looking for a practical template for your Business Partnership Agreement, or need a detailed, bespoke contract, our experienced team of company and commercial solicitors can help. Get in touch with a member of our team to find out how we can support your business.
