TRADITIONAL PARTNERSHIPS WHICH ARE NOT LLPS ARE FORMED WHEN TWO OR MORE persons are trading together in partnership with a view of profit. They can exist without a partnership deed and in such cases they are regulated by the default provisions in the Partnership Act 1890 (“the 1890 Act”).
Such partnerships are called “partnerships at will” which, while governed only by statute and not under the terms of a partnership deed agreed by the partners, will render the partners vulnerable as the default provisions under the 1890 Act can have unintended and unexpected results.
These include that a partnership at will can be brought to an end at any time by one of the partners giving notice to the other(s); for example, “I have lost the will to be in partnership with you”. Not only is this the most unstable relationship, there are a number of default provisions that will almost certainly not reflect the intended arrangements.
For example, under the 1890 Act, the partners are to share equally both the profits and the losses of the practice. Often this equal division does not reflect the individual contributions made. A partnership deed, by contrast, allows for individual interests and profit shares to be clearly defined.
When a partner decides to leave a partnership at will, the partnership dissolves automatically. This also happens when a partner is asked to leave or when a new partner joins.
Such dissolution may cause a forced sale of the partnership assets, potentially including the premises, redundancy of practice staff and automatic termination of contractual arrangements.
The problems can be multitudinous. In stark contrast, under a formalised partnership deed, dissolution should not occur unless all of the partners agree or a dissolution is ordered by the court or an arbitrator.
Limited Liability Partnerships
The Limited Liability Partnerships Act 2000 (“LLPA 2000”) introduced a new form of legal entity known as an LLP. This may be described as a cross between a partnership and a limited company. It can be used by a professional firm or a small business in which there are at least two partners.
Like a limited company, an LLP is a separate legal entity which gives limited liability to its members. It must be registered at Companies House and there is a cost involved.
An LLP will be governed by the “default provisions” set out in the LLPA 2000 and the Limited Liability Partnerships Regulations 2001 unless a members’ agreement (which is similar to a partnership agreement) has been entered into.
A members’ agreement is not mandatory and an LLP can be constituted without one. However, reliance on the default provisions is unlikely to be entirely satisfactory and therefore entering into a members’ agreement is highly recommended.
Where an LLP is formed by the incorporation of an existing traditional partnership, any partnership agreement which was in place does not automatically carry over.
While a member leaving an LLP without a members’ agreement will not bring about the end of the LLP, the default provisions in the Regulations may well be inadequate to deal with the sort of issues that often arise. An example of this is that there is no provision for the repayment of a retiring member’s capital.
Provisions to be included in partnership deeds and members’ agreements
In both cases these will contain the basic provisions necessary to ensure the business operates smoothly. The list below refers to partners but the same applies to members of LLPs. Such information includes, but is not limited to:
- Who the partners are
- The commencement date of the partnership
- The nature of the business and its name
- The provisions for the sharing of the profits and losses of the business
- Identification of what are partners’ personal expenses and what are the expenses of the business, such as professional indemnity insurance, locum insurance and costs of continuing professional development
- The investments to be made to the capital of the partnership
- The valuation mechanisms for the assets of the business
- The management of the business
- Voting provisions including decisions which can be decided by a simple or a specified majority of the partners and decisions, if any, which are to be subject to a unanimous vote of the partners
- Authorised absences such as absences for holiday leave, continuing professional development leave, leave for illness, maternity, paternity adoption and parental leave, compassionate leave, leave for Jury Service, any sabbatical leave and leave if a partner is suspended from the RCVS Register
- The terms relating to authorised absences such as how long a period is permitted, any continuing entitlement to a share of drawings and profits during the absence, who is responsible for the cost of any locum that is required, the partner as an individual expense or the business, whether holiday leave continues to accrue during the absence and whether any accrued holiday leave may be added to extend the period of absence
- Provisions for dealing with unauthorised leave encompassing not only whether the partner will be entitled to any share of drawings and profits but who will be responsible for the cost of covering their work while they are absent
- The partners’ obligations to each other including personal and professional conduct, promoting the business, not bringing the business into disrepute, making good any loss caused by their negligence, discharging their debts and liabilities and indemnifying the other partners against them
- The partners’ obligations to the business
- Whether a partner is permitted to carry out any work outside the business
- Who is to keep the payment for any work carried out outside a partner’s usual working hours
- The right to stop a partner carrying out work outside the business where this is considered detrimental to the business
- The resolution of disputes including provisions for mediation and arbitration where required
- The grounds for the expulsion of a partner
- Provisions relating to the admission of any partner, for example with regard to any probation period and contribution to capital
- Provisions relating to the death, retirement or expulsion of any partner, for example the period for payment out of their capital in the business and any undrawn profits
- Covenants from partners, including post-retirement covenants
While this appears somewhat obvious, the absence of a properly drafted partnership deed or members’ agreement may lead to problems emerging in the course of time. While partnerships may have operated satisfactorily without a formalised agreement for a number of years, changes in circumstances may create issues.
Previously cordial relationships between partners may worsen for any number of reasons, such as a partner feeling they are carrying out an increasing amount of the work for no extra reward, changes in a partner’s personal circumstances resulting in a change in their behaviour at work and/or their commitment to the practice, the absence of a partner on long-term illness, issues caused by employees, a new partner joining and disturbing the previously harmonious dynamic that existed between the other partners or simply the increasing stresses of running any professional practice.
Businesses are urged to adopt a preventive approach by formalising their arrangements, rather than suffering when problems arise. Disputes between partners in a partnership and between members of an LLP are inherently disruptive and very costly both in terms of stress and money.
While partnership deeds and members’ agreements do not always prevent disputes, they should provide a method by which to approach such disputes with hope of a resolution.
