General partnership agreements
General partnership agreements

The following Corporate practice note provides comprehensive and up to date legal information covering:

  • General partnership agreements
  • Default provisions
  • Common provisions in a partnership agreement
  • Parties
  • Partnership name
  • Nature and location of the partnership’s business
  • Commencement and duration
  • Capital
  • Partnership property
  • Profits and losses
  • More...

It will almost always be advisable for partners to enter into a partnership agreement in order to avoid application of any inappropriate default provisions in the Partnership Act 1890 (PA 1890) or to supplement the statutory provisions where they are insufficient.

Variation of the statutory rights and duties by the consent of all the partners is expressly envisaged in the PA 1890.

For an overview on the formation of a general partnership, see flowchart: Forming a general partnership—flowchart

Default provisions

There are key default provisions that will apply to the operation of a partnership in the absence of any specific agreement to the contrary:

  1. all partners are to share equally in the capital and profits and contribute equally to losses

  2. the partnership must indemnify any partner for payments and liabilities incurred in the ordinary and proper conduct of the partnership’s business

  3. every partner may take part in the management of the partnership business

  4. no partner is entitled to any remuneration for acting in the partnership business

  5. no person may be introduced as a partner without the consent of all existing partners

  6. any differences as to ordinary matters connected with the partnership business may be decided by majority vote but a change in the nature of the business requires unanimous consent

  7. no majority of the partners can expel any partner unless a power has been conferred by express agreement

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  1. where no fixed term has been agreed for the duration of a partnership, any partner may terminate the partnership by giving notice to the other partners

Common provisions in a partnership agreement

While the following provisions will often be included in a partnership agreement, the precise terms of a partnership agreement can vary significantly depending on the particular nature of the partnership and its business. For an example partnership agreement, see Precedent: Partnership agreement.

Parties

It may seem obvious that the partners will need to be listed in and be parties to the partnership agreement, but it will need to be specified whether all partners have equal status or whether there are to be different categories such as, on the one hand, full, equity or voting partners and, on the other hand, salaried, fixed share or non-voting partners. The latter categories of partner are likely to require a lower level of capital to be invested in the partnership and have more limited rights to participate in management and to share in the profits but may also bear a smaller share of losses.

Depending on the precise terms, such salaried partners may or may not be ‘partners’ for the purposes of the PA 1890 but, if held out as partners, they will be liable to third parties as a partner. See Practice Note: The nature of a general partnership and its legal framework.

The partnership agreement may provide for salaried partners to benefit from an indemnity from the equity partners.

Partnership name

It is usual to include a statement of the partnership’s name. There may also be a provision restricting a departing partner from setting up a similar business under the same or a similar name. For restrictions on partnership names see Practice Note: Forming a general partnership and continuing obligations.

Nature and location of the partnership’s business

While it will usually be obvious to the initial partners both what is the partnership’s business and the location of the partnership’s premises, explicitly stating this in the partnership agreement will provide evidence of the partners’ initial intentions in the event of later disagreement over a move into a different business area or the opening of new premises.

It will also indicate what might constitute a change in the nature of the partnership’s business requiring unanimous consent in the absence of any other agreement.

Commencement and duration

It is important to specify a commencement date for the partnership, since partners will be liable for the debts and obligations of the firm from this date.

Occasionally a commencement date prior to the partnership agreement is stated, in which case the agreement is recording what has taken place, although whether the partnership has been operating from such date will be a question of fact.

If the earlier commencement date is an inaccurate statement of fact, it may bind the parties, as between themselves, but will not affect third parties or, for example, alter the tax position.

In the PA 1890 partnerships are described as being for a fixed term or an unspecified time (a partnership at will). A partnership at will can be terminated by notice from any partner.

In the absence of some special purpose (where the partnership is to last for a specified fixed term or until completion of a particular venture), a partnership agreement will usually state that it continues until terminated in accordance with the provisions of the agreement (thus avoiding the formation of a partnership at will) and exclude the right of a partner to dissolve the partnership by notice.

Capital

The partnership agreement should include a statement of the partners’ initial capital contributions. The capital accounts will usually be expressed in monetary terms so that where a partner contributes an asset, the value of that asset at the date of contribution is credited to that partner’s capital account.

There may be additional provisions stating the circumstances in which partners may be required to provide additional capital (if this could be required with less than unanimous approval) and setting out the minimum amount of capital to be provided by any incoming partner.

In the absence of any agreement to the contrary, the partners cannot be compelled to contribute further capital to the partnership (even where the original capital has been exhausted).

Provision may be made for notional interest to be paid on partners’ capital accounts, particularly if capital contributions are unequal. The interest credited will in fact be an initial allocation of the partnership’s profits. In the absence of any agreement, partners are not entitled to interest on their partnership capital.

Partnership property

Partnership property is property originally brought into the partnership stock or acquired on account of the partnership. It is preferable to set out in the partnership agreement if there are specific assets, such as the partnership’s premises, that are partnership property. Where the partnership uses an asset that belongs to one of the partners, it is advisable to make clear in the agreement that such asset is not partnership property and the terms on which the partnership is permitted to make use of the asset. For further information, see Practice Note: The nature of a general partnership and its legal framework—Partnership property.

Profits and losses

The default provision is that all partners share equally in profits and losses, which will only be appropriate in the simplest of partnerships.

There is, therefore, usually a detailed provision setting out how profits and losses are to be divided. Frequently the clause will set out the order in which payments are to come out of profits; so, for example, the amounts allocated as salaries or fixed shares would be paid first, together with any interest on partners’ capital. The basis for division of the remainder of the profit will be as complex as needed. There may be a division on the basis of seniority or by reference to financial or other performance criteria and the allocation may be decided by a committee of the partners. There may also be a combination of the above approaches, with part of the profits being divided on seniority and the remainder as a pool for allocation on different criteria.

Where the division is based purely on seniority, the allocation procedure risks contravening age discrimination legislation unless it can be justified as a proportionate means of achieving a legitimate aim. For further information, see Practice Notes: Justification in discrimination claims—Age: both direct and indirect discrimination may be justified and Justification in discrimination claims—Age: issues specific to justifying age discrimination (a subscription to Lexis®PSL Employment will be required).

The partnership agreement will usually provide for partners to be paid an amount during the course of the year (known as drawings) in anticipation of their share of the profits once the annual accounts have been finalised.

The partnership agreement may provide for other employment-related rights of the partners such as holidays, maternity and other leave, provision of motor cars and private health insurance.

The partnership agreement should also state whether losses are to be shared in the same manner as profits; salaried or fixed share partners may be indemnified by the equity partners against losses.

There may also be a different division of capital profits from income profits in which case this must be specified.

Banking and accounts

It is customary to state the bank and branch at which the partnership’s bank accounts will be held and the required signing authority for financial transactions, together with confirmation that all moneys due to the partnership are to be paid into the partnership’s accounts and a requirement that all partners record receipts and expenses accurately. The required signing authority for cheques and other banking transactions should also be set out.

The year end date to which accounts will be prepared, accounting principles to be applied and the approval process for the partnership’s annual accounts will also usually be set out, as will the identity of the accountants who are to prepare and, if required, audit the accounts (unless this is to be approved each year by partner vote).

Provision should be made for partners to have separate capital and current accounts, the latter being credited with any undrawn profits that the partner may withdraw at their option, as distinct from capital, which would usually only be withdrawn on retirement or dissolution.

Management and voting

The default provision is that all partners can take part in the management of the partnership business. Any differences as to ordinary matters connected with the partnership business may be decided by majority vote but a change in the nature of the business requires unanimous consent.

This will be inappropriate particularly in large professional partnerships, which are likely to have a complex management structure with one or more partners engaged full-time in managing the partnership. In such cases, day-to-day management is delegated to a managing partner and one or more committees that have power to take decisions within specified parameters.

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