Is Your Partnership Agreement Still Fit For Purpose?

5 January 2024

As a business owner in partnership with others, you probably took great care to consider the key issues and agree a carefully worded partnership agreement at the formation of your business. But once signed, has this important document been filed away under lock and key without a great deal of attention since then?

There are major risks in not reviewing your partnership agreement regularly. It may not serve its main purpose as a reference point in administrating your partnership and in preventing legal disputes between the partners. In more extreme cases, your agreement may even be deemed null and void, and you would have to fall back on the provisions of the Partnership Act 1890 – a simplistic piece of legislation which would apply rudimentary terms which may be contrary to your interests.

There are many different circumstances that should trigger a review of your partnership agreement, such as a change in the law or the business structures. And it is vital that business partners keep their terms under regular review to ensure the agreement remains fit for purpose.

What Should Trigger A Partnership Agreement Review?

It is wise to carry out a periodic review of your partnership agreement, for example every two to three years, or as you deem appropriate in the circumstances.

You should also review the agreement whenever there are major changes or developments within your business, or when there are significant external factors. Some of the key triggers for a review include:

Change to partnership structure – as you grow you may wish to change the structure of your business, for example bringing in a new tier of salaried partners or fixed-share partners. Any such changes should trigger a review of your profit-sharing arrangements to make sure that no inadvertent anomalies are introduced. You will also need to decide how such structural changes should impact on agreed partner liability for losses and additional capital contributions etc.
New or departing partners – if you bring on board a new equity partner, or if there are changes to the partnership as a result of a resignation or retirement, then you should revisit your agreement. In the case of a new partner, you should ensure that any agreed onboarding terms are reflected. A resigning or retiring partner who is not being replaced may still necessitate changes, for example if they are carrying out fundamental roles for the partnership that require reallocation, such as managing partner or finance partner.
Financial variations – if you wish to make any changes to the partners’ profit shares or any other financial variations (such as capital accounts) then such changes should be reflected in the agreement. It may be that such matters are dealt with in the schedules at the end of the agreement, and if so, it may be that only the schedules require updating. It is so important that profit and loss sharing and capital contributions are accurately reflected in the agreement at all times, as these are the areas that can notoriously lead to a partner dispute. Including worked examples, with detailed calculations, can be particularly helpful where there are complex or varied distributions or separate ‘bonus’ profit allocations.
Change in law – if there is a change in the law, such as with regards to taxation, then you should take appropriate legal and accounting advice to see if there are any tweaks that should be made to your agreement to benefit you. For example, if there are particularly generous capital allowances introduced that you wish to benefit from, you and your fellow partners may agree to relax your retained profit policies to free up additional funds for tax-efficient investments.
Business pivot – if your business has changed, or plans to change in a significant way, then you should revisit your partnership agreement to make a critical assessment as to whether the terms still align. For example, if you are a ‘bricks and mortar’ retailer and transition to an online-only business model, it will involve many practical changes to your business, which would ultimately affect your partnership. You may need less working capital and fewer staff members due to closing retail units. You may need additional capabilities in new fields, such as e-commerce, digital marketing and warehousing and fulfilment etc. As such, the make-up and approach of the partnership would have to evolve as a result, leading to partner incomings and outgoings, increased outsourcing, shifts in policy and budgeting, international growth focus and so on.
Business purchase – if your partnership purchases the assets of another business, then naturally your business will evolve in various ways. The asset purchase may lead to your workforce increasing overnight, with a significant impact on your profit and loss and balance sheet. Where the business purchase materially impacts these areas, it is only sensible to review your partnership agreement. The enlarged business may shift focus onto areas of the agreement that had previously been overlooked, such as financial management, partner authority levels and day-to-day management clauses.

What Are The Risks Of Not Reviewing?

If your partnership agreement becomes out of date, lagging behind developments within your business or developments in the law, there are various risks that can arise.

This can lead to a lack of clarity and certainty if the agreement no longer reflects your business as it operates. In turn, this uncertainty can lead to disputes between partners and any ambiguity can be the cause of partners arguing over their preferred interpretation.

Of course, any such disputes also become more challenging to resolve. The partnership agreement is intended to provide a reference tool for resolution, but it cannot perform that role if it is out of date.

In a worst-case scenario, your agreement may be deemed null and void and it may be that the court would have to resolve any disputes according to the law as opposed to the original intentions.

How We Can Help

If you are in partnership and have not reviewed your agreement recently or have made changes to your business that need to be reflected, then get in touch with our team of commercial solicitors without delay. We can take a look at your existing agreement, advise on any changes which ought to be made, and carry out the necessary drafting work required. You can then focus on your business in the knowledge that your partnership agreement remains fit for purpose.

For an informal conversation, please contact us.

Notes

For further information about partnership agreement, click here.