Deed of partnership – why, what & how

Deed of Partnership

What is a partnership?

A partnership is a form of business where the parties agree to work together towards a common goal. Partnerships are relatively easy to establish, they are owned by two or more people (or companies) who share the responsibility for running the business. A partnership does not have a separate legal personality; it is dependent on the partners. Partners will draw up a deed of partnership to establish it and write down the terms of the agreement. There is no limited liability in a partnership: each partner is equally responsible for the debts of the business, which could be risky depending on their financial situation. Creating a partnership does not cost anything and no formalities are required, which is why some companies start as a partnership. Examples of partnerships are lawyers, accountants or surveyors.

What is a deed of partnership?

A deed of partnership is a legally binding agreement between partners who own the business. The agreement normally includes a provision as to how the profits will be shared between the partners and what will happen to the partnership’s capital on its dissolution. It will also describe how new partners can join the business, what happens when a partner retires and set out provisions to terminate the partnership as well as the duties and rights of the partners.

Why have one?

It is not a legal obligation to draw up a deed of partnership when starting a business but it can save a lot of misunderstanding and prevent future disputes between the partners. It is advisable so that the partnership has got solid foundations to enable its proper functioning.

What does it contain?

Most common provisions include:

  • The partners’ mutual rights and obligations (they can be varied if all of the partners agree)
  • The amount of capital each partner will contribute
  • The share of profits and losses between the partners
  • The remuneration: a description of how the partners will be paid (should they receive salary etc.)
  • The decision-making process: most of the decisions will be made by the majority of partners but some of them might have to be taken unanimously
  • The working arrangements: how much time should each partner dedicate to the business and who performs which function
  • Any changes to the structure of a partnership: what happens if a partner leaves, dies or when a new partner joins
  • The partnership’s property: anything brought to the partnership such as through a purchase on behalf of the partnership for the purpose of and in the course of business belongs to the partnership: the deed might include provisions as to what happens to that property after the partnership is resolved
  • The internal relationship between the partners: there is a fiduciary relationship between the partners, which is one of mutual trust. The deed might include provisions such as of full disclosure, reporting any conflict of interest and not to make any profit unauthorised by the partnership
  • The external relationship with contractors, clients etc.: the deed should describe what the nature of agreements or contracts made by individual partners is: do they bind the partnership automatically or should they be authorised and confirmed by the rest of the partners?
  • The liabilities: since the liability is not limited, all of the partners are liable for the partnership’s debts: the deed should state and make it understandable to the partners that they are all jointly liable for any contractual liabilities (any of them can be asked to pay off the debts) and their tortuous liability is joint and several (they are all responsible individually as well as equally with the other partners)

What if there is no deed?

If a partnership decides not to have a deed, it will be governed by the legal provision set up by the Partnership Act 1890. The disadvantage of not having a deed is that some of the provisions of the Act might not be suitable to your partnership and it may not offer all of the solutions that could be included in a deed.

Get in touch with us for a free initial discussion about partnership or for a quote to prepare a deed of partnership.

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