Create a partnership agreement

A partnership agreement sets out how your partnership operates and what happens when things change. While not legally required, having a written agreement protects all partners and prevents costly disputes.

Do you need a written agreement?

Even so, a written agreement is worth having. Oral terms are hard to prove if partners later disagree, banks and investors may ask to see the agreement before lending or investing, and drafting it makes you settle profit sharing, exit and disputes before any conflict arises.

What happens without an agreement

If you have no partnership agreement, or your agreement does not cover a particular issue, the Partnership Act 1890 defaults apply automatically.

Why these defaults often cause problems

• Profits are shared equally, so a partner who puts in 90% of the capital and does 90% of the work still receives only 50% of the profits.
• Partners who work full-time in the business cannot draw a salary, only their profit share.
• One dissenting partner can block a new partner who brings essential skills or investment.
• The partnership ends automatically when a partner dies, which can force a quick sale of assets.

The 1890 Act was written for a different era, so set your own terms in the agreement.

What to include in your agreement

A comprehensive partnership agreement should cover these areas. The more detail you include now, the fewer disputes you will have later.

Drafting your agreement

DIY or professional help?

Simple two-partner businesses with equal contributions may be able to use a template agreement. However, professional legal advice is strongly recommended in most cases.

Common mistakes to avoid

• Do not copy a generic template without adapting it. Clauses that work for a retail partnership may not suit a professional practice.
• Do not ignore tax. How you allocate profits affects each partner's tax bill, so ask an accountant about the profit-sharing structure.
• Define how a share is valued. "Fair value" means nothing on its own, so say who values it, on what basis (book value, earnings multiple or independent valuation) and how disputes are resolved.
• Update the agreement when things change. An agreement written for two partners does not automatically work when you add a third.
• Check your regulator's rules. Regulated professions such as solicitors, accountants and architects have extra rules about partnership structures.

Updating your agreement

Partnership agreements should be reviewed and updated when circumstances change. Using a formal Deed of Variation ensures changes are legally binding.

Special considerations by business type

Professional practices

Solicitors, accountants, architects, and other regulated professionals often have additional requirements:

• Professional indemnity insurance minimums may be higher for partnerships
• Regulatory bodies may have rules about partner eligibility and profit sharing
• Consider lockstep profit-sharing (seniority-based increases) common in professional firms

Property partnerships

Where the partnership owns property:

• The partnership agreement should address how property is held (as partnership asset or by partners individually)
• Capital Gains Tax implications differ depending on ownership structure
• Consider whether departing partners can force sale of property

Family partnerships

Partnerships between family members need particular care:

• HMRC scrutinises profit allocations to family members for tax avoidance
• Profit shares must reflect genuine work contribution or capital investment
• Consider what happens if family relationships break down