Continuing our series “7 Reasons Why You Don’t Need a Partnership Agreement”, our in-house company law expert Spencer Laymond, has turned this subject on its head, to set out and defend seven reasons why you don’t need a partnership agreement.
If you missed the previous reasons they can be found:
Here is the seventh and final reason….
Reason 7 - It is reasonable for one partner to take full responsibility for paying the debts and liabilities of a bankrupt partner
If your business partners all become bankrupt, and the partnership has liabilities to pay, if those liabilities are either not covered by insurance, and you are happy to solely pay all the liability yourself, as your partners do not have the means, then you don’t need a partnership agreement.
Check the law yourself
Under the Partnership Act 1890, section 9 provides that every partner in a firm is liable jointly with the other partners for all the debts and obligations of the firm.
Whilst there are some finer distinctions to this rule, the joint liability rule is a sound principle on a statutory footing. Furthermore, keep in mind another consequence of partnership is that all partners are jointly liable for:
(a) wrongful acts and omissions of the other partners, in other words all partners are jointly responsible for the negligence of another partner; and
(b) the misapplication of property or money received from third parties by one partner, in other words all partners being jointly responsible for another partner doing a bunk with a client's money.
So if you do not fancy being the fall guy and having to risk losing your home and jeopardising the financial integrity of your family assets, then a partnership agreement will be required.
Moreover, depending on the nature of the business and availability of insurance, it may even be necessary to incorporate your partnership into a limited liability partnership (LLP); the subject of which is a blog for another occasion.
In conclusion we can say that you may not need a partnership agreement, and you can save yourself the money in having one prepared, if:
- You and your business partners are immortal;.
- It is reasonable for any one partner, at any time, to put the business into dissolution;
- You and your business partners are happy to divide profits and losses evenly, even if you have you contributed different amounts of capital;
- It is reasonable for a majority of partners to oppress a minority of partners;
- It is reasonable for a partner leaving the business to (a) freely take with them existing partnership clients (b) work for local competitor (c) poach existing partnership staff;
- Even if a partner's conduct is akin to gross misconduct, they are disqualified from their profession, they have committed murder, it is reasonable not to have a right to expel them; and
- It is reasonable for one partner to take full responsibility for paying the debts and liabilities of a bankrupt partner.
However, if none of the above applies to you, and you are in a partnership, then you really should consider putting a partnership agreement in place.