Graeme Jump, dispute resolution partner at North West law firm Mace & Jones, looks at why it is important to have a partnership agreement when setting up a business with colleagues, following a recent case.
Question:
Five years ago I set up in business with two friends from University. Things have gone well but we are now arguing a lot over the future strategy and funding for the business. I have decided I want to get out. What is the best way to achieve this?
Answer
I am going to assume that you have not been trading through the medium of a limited company. On this basis you and your colleagues are trading in partnership. Because you haven’t mentioned it, I am also going to assume that you do not have a formal partnership agreement.
The likelihood is that, legally, your partnership is what lawyers call ‘a partnership at will’. In brief, this means that the partnership will continue as long as all the partners so wish. If a partner wishes to bring the partnership to an end, then he / she can do so, on notice – a matter of hours or perhaps even less.
So, bringing your partnership to an end is relatively easy!
The more difficult process is the ‘winding up’ of the business. The Partnership Act 1890 provides the framework of how this should be conducted – in short all assets of the partnership are required to be realised, the creditors paid before distribution of any remaining surplus is made to the partners. The assets include, for example, the name of the business and its intellectual property.
Whilst the winding up should be conducted in an orderly manner, to ensure a fairness between the partners, it often tends to be a ‘free for all’. For example, individual partners attempt to hijack customer lists and contacts and even the name of the partnership. This can lead to lawyers becoming involved at a very early stage and sometimes court proceedings with injunctions being sought to bring some order to the process.
When contemplating partnership the lesson is always, always, to enter into a properly drawn partnership agreement. It is the constitution for the business. It will provide for the admission of new partners and retirements including all the attendant financial consequences. Issues as to ownership of property whether freehold or leasehold, will also be included. Broadly a properly drawn partnership agreement will try to address much of what is found, in the case of a limited company, within articles of association and shareholder agreements.
Trading without a partnership agreement is a high risk strategy! Patience and an experienced accountant are probably your best aids at this stage!
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