Deed of partnership
Legal Legal Advice

Deed of Partnership. Here’s Why You Need a Written Partnership or Shareholders Agreement

17 Aug 2020

Disputes often arise purely because of a lack of clarity, and that doesn’t only apply in business. However deeds of partnerships or shareholders agreements can help avoid this. Misunderstandings are a part of everyday communications, and they can happen easily. Even the strongest of relationships can have ups and downs, and business partnerships are certainly no exception to that. What’s important is to try and get ahead of any potential problems by creating a deed of partnership, otherwise known as a partnership agreement or a shareholders agreement. Having a plan for tackling disagreements, misunderstandings, and even full-blown disasters is often enough to nip them in the bud quickly.

Disputes within companies can be extremely costly, and nobody really wants a situation where a lack of clarity causes something like that to happen. The trouble is, we often don’t see the glaring need for a deed of partnership until it’s too late – and the lack of an agreement can see organisations experience huge setbacks or even go under. The good news is that a little foresight is enough to protect against such negative outcomes.

What is a deed of partnership or partnership agreement?

A deed of partnership, also known as a partnership agreement or a shareholders' agreement, is just another way of planning for the future of your venture. It removes the sort of doubt that can often cause a sense of aggrievement in business. Setting up a deed of partnership is easy, but it might just be one of the most critical steps you take in ensuring the longevity of your company. When a deed doesn’t exist, businesses find themselves at the mercy of the Partnership Act 1890 – and that legislation will apply whenever there’s a dispute or uncertainty about how to proceed.

As the name suggests, the act that governs partnerships was drawn up during different times, and it’s by no means a failsafe for modern businesses. There are no provisions within the law for retirements or death, for instance. In fact, there’s a distinct possibility that in the case of the latter, you might need to dissolve a partnership where no deed applies. What’s even more bizarre – and hugely worrying – is that reliance on the Partnership Act can make your business extremely vulnerable. Apart from that fact that disputes are harder to resolve, any individual can get the partnership dissolved at any point in time – simply by serving notice.

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shareholders agreement

How can a deed of partnership help me avoid trouble?

The interests of the business must get weighed against the concerns of any individual partner. It may seem over-the-top to be thinking about future disagreements when you’re excited about starting a new venture. Generally, everyone gets on well when a business begins, and all are working toward a common goal – yet, the long hours, financial stress, and plain hard work can quickly change that. When entering into any partnership, it’s a good idea to consider the following.

  • What goes in?

Partners often disagree about the balance of work and capital input. Sometimes, one partner brings more money than time to a venture, and for others, the opposite is true. It can all work out just fine until it comes to trying to put a value on the arrangement. It’s far better to work that out from the get-go.

  • What comes out?

Who does what can influence the structure of profit-allocation. It’s a great idea to make sure the deed specifies the nature of how the nuts and bolts of the business go together. Think about working hours and who takes what out of the company. It’s essential to agree on what’s fair to all and set the ground rules from the start.

  • Who’s in charge of what?

Another cause of friction can arise around the separation of roles. Arguments can occur when too many equals have a say over the running of everyday operations. Try and specify a structure that makes the best use of everyone’s talents and distributes duties evenly too.

  • Who takes care of tax and records?

HMRC requires that any partnership nominate a partner who will be responsible for handling tax and bookkeeping. It’ll potentially prevent some squabbling if you include this in your deed of partnership.

  • What if I need time off?

Sometimes, the trouble with partnerships is they start out relaxed and then issues crop up when things get tough. Just as you’d have a clear idea of how much downtime you were entitled to when taking a new job, you should know what the arrangements are for annual leave within the partnership.

Related: Limited company or sole trader? Which is the best company structure?

What happens when a partner can’t or won’t carry on in their role?

A business partnership is supposed to be about pooling talents and abilities. The organisations that work best are the ones that harness everything good about a group but also protect against the potential for things to go wrong. One of the most important things to get right with any deed of partnership is making sure you’ve got strength in numbers – not weakness. It’s crucial to ensure an adverse event for one party doesn’t affect all. When you draw up your agreement, consider:

  • What happens if a partner wishes to retire?

  • What happens in the event of a death?

  • How will you handle things if a partner becomes insolvent?

  • What are the rules covering general misconduct by a partner?

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business man

Protecting your business against disagreements and the breakdown of relationships

You should also consider protecting the business against the possibility of general disagreements or legal squabbles. That involves having a set of rules in place for when partners simply can’t agree – and the terms of the deed don’t cover the reasons for that. Ideally, such a provision will negate the need for costly litigation or mediation in most cases. You can even nominate a body or individual trusted to provide a decision when things can’t be resolved internally – which will save everyone a lot of time and money.

Lastly, but equally important is the procedure and rules for a partnership dissolution. No partnership should be at the mercy of an individual – there’s far too much at stake. It’s important to include provisions for this in the deed of partnership from the start – so that no single party can leverage the threat of dissolution.

Partnership deeds promote and protect businesses

Establishing a successful business invariably involves a lot of hard work and personal sacrifices. A partnership is a great way to achieve success but can lead to situations where one person feels they’ve been burdened more than others. Issues can also arise over working conditions, hours, and even pay. Yet, the fact remains all partners have a common interest in making things work and not falling out.

An excellent way to look at deeds of partnership is that they exist to protect everyone involved with the venture – and the venture itself. They’re a way of avoiding awkward situations, so should never be considered uncomfortable to discuss.

Our solicitors specialise in corporate law

At Accounts & Legal, we believe that your hard work should never go to waste. If you’re worried about securing the future of your venture, the potential for a partnership disagreement – or you just want to stay ahead of the game, get in touch.  

In addition to offering accounting services and tax services, including Xero accounting and online accounting, we have a team of solicitors who specialise in corporate law, employment law, commercial law and a range of legal disciplines centred around SMEs.

Our experienced solicitors can help with company formation and starting a business in the UK, while our accountants can get you set up for corporation tax and payroll with HMRC. We can also help you write a business plan, model your cashflow, and set up a shareholders agreement or deed of partnership to document the rights and responsibilities of each shareholder.

In our Guide to Shares and Shareholders, we dive into some of the issues mentioned in this article in more detail.