Following a question this week and with the help of my colleague Alice Galley, I thought it would be worth setting out the advantages of formalising on oral partnership.
The first advantage of a written partnership agreement is that it has the power to override the default provisions of the Partnership Act 1890. This means that, without the written agreement, your business will be governed in accordance with the Partnership Act 1890, the results of which could potentially conflict with what either of you might want and may be disagreeable for the business.
Some examples of laws under this act are that if one of the partners were to pass away, the partnership will automatically dissolve, with the possible adverse tax consequences that could bring.
Other reasons on the back of this starting point include:
- A written partnership agreement can help clarify the roles and responsibilities of each partner in the business, meaning all are on the same page in terms of expectations;
- Most agreements have a framework built in for decision-making, including what kind of decisions require the unanimous agreement of all partners;
- A written agreement can be useful in raising capital and giving that level of confidence in potential investors, lenders, and other stakeholders;
- Well drafted agreements show that the partners have a clear understanding of their roles and responsibilities and are committed to the success of the business;
- The agreement can specify how profits and losses will be shared, how decisions will be made, and how disputes will be resolved, providing both clarification and protection for the parties; and
- Agreements usually include arrangements surrounding the departure of a single partner, including whether the remaining partner would carry the business on. These arrangements can also be altered at any given time, provided both parties agree, creating a far more versatile agreement.
Partnerships are often less can be easier to change individual responsibilities or rights, should there ever be the need to. Getting it in writing in relation to a partnership agreement can help provide clarity, protection, and structure to a partnership, which can help ensure its long-term success and remember that a partnership has the right to keep its affairs fully confidential. The written partnership agreement itself is a private document and it is not required to be disclosed to anyone outside of the partnership.
Regards to all