Amanda Lathia examines partnerships and important factors to consider that will help navigate future challenges

If you are thinking of entering a partnership or considering bringing a new partner into an existing partnership, there are some important factors to consider that will help navigate future difficulties.

In the absence of a written partnership agreement, the terms of your partnership will be governed by the Partnership Act 1890. This means that capital, profits and losses are deemed to be shared equally between the partners; there is no provision for retirement; there is no mechanism for admitting a new partner; and if there are only two partners, the death of one will automatically dissolve the partnership. It is not an exaggeration to say that the Act provides for only the most basic of terms.

Written partnership agreements are a vast improvement in that they provide clarity on who the partners are, what their capital contributions and profit shares are and what provision has been made for death, retirement and expulsion. You can also provide what you would like to happen on transfer of partnership shares, for example, if you want to keep the business under the control of a certain group of people or within a family.

Family partnerships present their own unique challenges. Often, these are governed by partnership deeds that were written many years ago, typically for a husband and wife team, particularly in the farming sector. Following the death of a partner, say an elderly parent, the focus of the partnership tends to shift to the younger generation, where succession and survival of the family business on the occurrence of a major event without sufficient forward planning are a source of major concern. The usual route to admitting a family member is via a deed of adherence, a relatively straightforward document that preserves the original terms of the partnership deed and providing the opportunity to introduce new terms to reflect the evolving business.

Complications may arise where the family member does not enter a deed of adherence but becomes involved informally on a verbal basis. In this scenario, both the status of the partnership and that of the individual can be ambiguous and a new partnership might be created, falling under the Partnership Act 1890 rather than under the terms of the partnership deed. Disputes can arise, despite the best intentions of all concerned, so to ensure that the partnership business can continue, you should carefully review your partnership deed, preferably before any major changes in family circumstances occur, such as marriage, divorce, cohabitation or bereavement. 

We recommend that you review your partnership periodically and that, if you do not have a written partnership agreement, you consider having one drafted (even if you think things are fine as they are).  It will save you time and money when events happen or things do go wrong.