Definition of a partnership
A partnership is “two or more individuals working together in a business with a view to making a profit”.
One of the individuals does not employ the other. Partners work together and if the business does well they will share profits, and if the business does poorly they will share losses. It is important to realise that joint ownership is not sufficient to create a partnership – the individuals must actually be carrying on a business in common with a view to profit.
It is essential to have a partnership agreement in place. Not all partnerships have such a formal agreement, but this is far from ideal. The partnership agreement should lay out the partners' understanding of how the partnership should be governed. The agreement should cover:
• How the profits and losses of the partnership are going to be shared. Profits could be shared equally, they could be 60:40 or some other split – it is whatever the partners decide;
• The rules on admitting a new partner to the partnership. The individuals could set up the partnership and they may decide to take in somebody else further down the line. The partnership agreement should address how this is to be accommodated;
• The retirement of a partner. This may include notice periods, or some partnerships even have compulsory retirement when a partner reaches a certain age. There may also be detailed calculations of goodwill payments for the retiring partner;
• Death of a partner;
• Establishing the right to expel a partner;
• The conduct of partners and the ownership of assets. Assets are not always owned equally between the partners – some more senior partners may have a greater share of the assets.
• The resolution of disputes;
• The partners' understanding of how they see the partnership working, including working hours, holidays, decision-making procedures, business premises, etc.
When partnerships commence it is normally on good terms, and therefore this is an ideal opportunity to draw up the partnership agreement.
As the partnership progresses, relations between partners may deteriorate and in these cases the partnership agreement becomes vital. The partners will be bound by the agreement they signed on commencement.