4 david-allen.co.uk WINTER/SPRING 2018 The importance of a partnership agreement We come across many family farming partnerships that do not have a partnership agreement in place and where those involved do not realise the complications this could cause down the line. A partnership agreement is not just another way for professionals to create work. It is a vital document to ensure the smooth running of your business. A partnership agreement can be as long or as short as you wish but professional advice should always be sought. “Just like a Will, a partnership agreement should be reviewed regularly...” Key areas to include in a partnership agreement are: • The business name and name of each individual partner. • The commencement date and term (length) of the partnership. • How annual profits and losses are distributed among the partners. • The allocation of capital profits or losses. • How much capital each member of the partnership has. • What is classed as a partnership asset and which assets are held by individual partners. • When and how any drawings should be made – will these be agreed in advance or as and when necessary? • Confirmation of who has authority to sign cheques and agree credit terms. • Whether there are any circumstances in which a partner may be expelled from the partnership. • The process to deal with the death or retirement of a partner. • Provisions to deal with the partnership being wound up. Just like a Will, a partnership agreement should be reviewed regularly to ensure it is fit for purpose and does not require updating. All partners can set out how the partnership should be conducted including who has control of the business and who can make management decisions on a daily basis. The partnership agreement is normally called upon when there is a partnership dispute or a retirement. It is essential to calculate the value of the outgoing partner’s share to help achieve an amicable resolution. The consequences of not having a partnership agreement in place: If a written partnership agreement is not in place then the provisions of the Partnership Act 1890 will be deemed to apply, often with unintended consequences. Profits In the absence of a specific provision to the contrary, the Partnership Act provides that profits should be divided equally. This can be problematic where there is a part- time partner or a sleeping partner and the partners wish to reflect this in the profit share. Dissolution and retirement The Partnership Act states that at any time any partner can dissolve the entire partnership by notice to the other partners with immediate effect. The partnership’s assets must be realised, its liabilities must be paid and any surplus returned to the partners. This situation would rarely be ideal for any farming business. For more information about partnership agreements, call Michael on 01228 711888. Michael Peile Agricultural Partner michael.peile@david-allen.co.uk !!!