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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 in the links below:

- The 7 Reasons Why You Don’t Need a Partnership Agreement

- 7 Reasons Why You Don’t Need a Partnership Agreement – Reason #2

Reason 3 - You and your business partners are happy to divide profits and losses evenly, even if you have you contributed different amounts of capital

Say, for example, you are in a three person partnership. Partner 1 has invested £10,000, partner 2 has invested £20,000 and partner 3 has invested £30,000. We are treating the investments as genuine capital contributions, in the sense that once the money has been invested in the partnership, it becomes permanently endowed to the partnership. The total capital invested is thus £60,000, of which partner 1 has invested 16.67%, partner 2 has invested 33.33% and partner 3 has invested 50%.  Each partner does exactly the same work, and contributes exactly the same amount of the time to the business. Each year the business makes profits of £100,000, and each year all partners are happy to share the profits equally so that each partner receives £33,333.33. Equally if each year the business makes losses of £100,000, then the partners are happy to share the losses equally. If all partners are happy for the profits and losses of the partnership to be shared evenly, then you don’t need a partnership agreement.

Check the law yourself

If you want to check the law for yourself, its section 24(1) of the Partnership Act 1890.

However, if you and your partners wish to share profits (or losses), in a way which reflects the original investments, and perhaps different on-going contributions, then a partnership agreement will be required.

Keep in mind also that capital contributions may not be solely cash, but other property such as land, equipment, specialised knowledge, connections and so on. Whilst partnership accounts may make clear what assets are owned by the partnership, and what assets are retained personally by an individual owner, there have been occasions where the courts have not accepted the evidence of the accounts. Another reason for a written agreement .

Next week – Reason 4 – Why You Don’t Need a Partnership Agreement

Don’t forget to tune into next week’s Reason 4 - It is reasonable for a majority of partners to oppress a minority of partners.