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Drifting into a business partnership? A formal agreement may limit your liability

13th October 2017

It is surprisingly easy to become someone’s business partner. Legally, a partnership exists when two or more persons carry on business in common with a view to profit. So if you and your friend carry on a business activity, hoping to make some money from it, you may well find that you have started a partnership. It really is as simple as that.

Precisely because it is so simple, many people find themselves in a business partnership without having thought the matter through and without having considered whether a partnership is really what they want or how the affairs of the partnership should be arranged.

Whilst there is no legal need for a written partnership agreement, it is an outstandingly good idea to have one. If you choose not to, your partnership will be fully-governed by the Partnership Act of 1890 – and it is unlikely that the terms of a law passed more than 100 years ago will completely suit your business needs today.

One of the biggest and most frequently overlooked risks is personal liability. Legally, and unlike a limited company or a limited liability partnership, an ordinary partnership is not a separate entity – and because a partnership consists only of the individuals in the business, each of the partners assumes unlimited liability not only for their own actions but also for the actions of their fellow partners.

A recent Court of Appeal case served up a stark warning to partnerships when a partner was judged jointly and severally liable to a third party for a fellow partner’s breach of duty, even though the breach of duty occurred after the appealing partner had resigned from the partnership.

The best way to limit each partner’s authority and to reduce your partnership risks is to draw up a written agreement setting out your joint financial and business intentions. The document can also set out protocols governing any future disputes within the partnership and what happens should a partner die in service or choose to leave the business – anyone considering entering into a business partnership of any kind would be well-advised to set up such an agreement.

If you want to know more about the legal implications of a partnership agreement, or if you would benefit from impartial and reliable business advice, George Ide’s expert corporate lawyers are on your side. Call us on 01243 786668 or email the team atmailto:info@georgeide.co.uk

Robert Enticott. Partner, commercial department.

 

Business, Commercial Property, General, George Ide, News
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