Partnership and Shareholder Agreements

You may be starting or entering into a new business with others.  That might be a partnership or limited company or a limited liability partnership (LLP).  A partnership agreement or shareholders’ agreement should be considered at the outset of your business to set out clearly the basis on which you want to run your business with your fellow owners.

Partnerships 

In the absence of a partnership agreement, the legal position is as follows:

• all partners can take part in the management of the business and generally day-to-day matters are decided on a majority basis
• all property brought into the partnership or bought with partnership money belongs to the business
• none of the partners are entitled to interest on the capital they contribute 
• all partners are deemed to share equally in profits and to be equally responsible for any liabilities
• no existing partner can be removed unless all partners agree
• any partner has the right to give notice to the other partners that he is dissolving the business and  there is no minimum period of notice required to be given
• if one of the partners dies or becomes bankrupt or otherwise leaves the business this automatically dissolves the partnership
• there are no restrictions imposed on any partner who leaves the business e.g. to prevent them poaching clients
• it is not clear if a leaving partner should receive any value in relation to the goodwill of the business

A well drafted partnership agreement will allow you to address these and other issues to provide alternative arrangements better suited to your business. 

Limited Companies

Similarly, whilst the Company’s Articles of Association will set out how the business is governed, it is unlikely that those will deal with numerous important matters:

• How are day-to-day decisions made?  For instance, there will be some issues that should require unanimous agreement while others might only need a majority decision
• What happens if a shareholder wants to leave the business? Or are there circumstances in which a shareholder should be required to leave?
• Do the other shareholders have the right to buy the shares of a departing shareholder and what happens if they do not want to?  How are the shares to be valued?
• What happens if some but not all shareholders want to sell their shares to a third party?

These are all issues best addressed while all involved have the same interests, ideally at the beginning of your business relationship.