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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.

• The 7 Reasons Why You Don’t Need a Partnership Agreement
• 7 Reasons Why You Don’t Need a Partnership Agreement – Reason #2
• 7 Reasons Why You Don’t Need a Partnership Agreement – Reason #3

Reason 4 - It is reasonable for a majority of partners to oppress a minority of partners

Here we are concerned with the day to day management of the partnership business as well as the longer term direction of the partnership. If you are a partner, you will automatically have a right to participate in the management. However, if you have no issue for your voice and opinion to effectively fall on deaf ears and to count for nothing. If you have no issue with the seniors steering the ship as they please. If you have no issue with how decisions, big or small, are resolved, then you may not need a partnership agreement.

Check the law yourself

Under the Partnership Act 1890, section 24(5) provides that  every partner is entitled to take part in the management of the partnership business. Whereas section 24 (8) then provides that differences on "ordinary matters" connected with the partnership business may be decided by a majority of partners.

The law being the law, the rules are subject to two exceptions, a few provisos and a qualification.  

The exceptions are the two matters where even a minority partner has a veto. First, changes to the nature of the business, for example, going from software development to fish farming. Second, whether to admit a new partner. But that is about the sum of it so far as the statutory veto rights go.

The provisos. All partners have a right to be heard. All partners have a right to be notified of meetings . All partners owe a duty of good faith to all partners. Nevertheless, when it comes to voting, the minority can still be outvoted.

The qualification. The rule is the majority decide "ordinary matters", but what may be regarded as an ordinary matter in one partnership, may not be regarded as an ordinary matter in another partnership. So it is not just the number of partners voting for or against a matter that may count, but what the matter itself relates to. Is it an ordinary matter or not?

The takeaway point here is that the Partnership Act creates scant protection for partners who find they are being oppressed by the majority. But if this is acceptable then you don’t need a partnership agreement.

If certainty and fairness are important to you, and for many other reasons, then a partnership agreement will be recommended.

Next week – Reason 5 – Why You Don’t Need a Partnership Agreement 

Don’t forget to tune into next week’s Reason 5 - It is reasonable for a partner leaving the business to (a) freely take with them existing partnership clients (b) work for a local competitor (c) poach existing partnership staff