When a Partner departs

Most couples understand the need to make Wills to make life simpler for the survivor if one spouse dies.

Sadly the same doesn’t always apply to business partners preparing a partnership agreement and the resulting problems can be much harder to resolve than the agreement would have been to make in the first place.

Partnerships are generally entered into when times are good and everyone is enthusiastic and in agreement with each other. A partnership agreement is often seen as unnecessary or at least non-urgent.

What many fail to realise is that in the absence of a formal partnership agreement, business partners are relying on a piece of legislation that is nearly 130 years old to provide the default position. This is the Partnership Act 1890 (the Act).It is a very scant document providing some guidance as to how a partnership operates and what happens in the event of dissolution. The Act rarely provides the answers for the practical problems that modern partnerships face.

What follows is a typical example of the issues that can be caused.

Five individuals had been operating a partnership for a number of years without any issues. They had all contributed equally to the capital of the business and shared in its profit and losses equally. In this regard, relying on the default provisions of the Act that everything is split equally was working well for them. Until one of them passed away.

The default position under the Act is that unless there is an agreement between the partners to the contrary, each partnership is deemed to be automatically dissolved upon any partner leaving the partnership which one clearly does on death.

The result is that the remaining partners will be deemed to have formed a new partnership and this may not be appropriate or desirable. For one, as the business going forward is deemed to be a new partnership formed by the (in this case) four remaining partners, notices should be given to all customers, creditors and employees notifying them of the change in the make-up of the partnership.

Accordingly, a partnership agreement often states that a partnership shall continue despite the departure of one or more partners. Such agreements also cover other matters which are not catered for by the Act. For example, under the Act apartner cannot be expelled by the others. There may be a number of reasons why partners may wish to expel a partner, and these should be detailed in a partnership agreement.

Entering into an agreement often has the practical benefit that the parties fully document from the outset what their expectations are for the partnership, both during its lifetime and after its termination. By proceeding with the agreement, everyone can be confident that appropriate consideration has been given to such matters.

Figures released in 2017 by the Office for National Statistics show that the popularity of the business partnership is declining with only just over 8% of UK businesses now opting for this structure. Anyone starting a new business would do well to seek advice on the most appropriate trading vehicle before forming a commercial partnership. If a partnership is the chosen structure than a partnership agreement should be made at the outset rather than thought of as an optional extra.