The Perils of Partnership Law
It is surprisingly easy to enter into a business partnership and you can do so with very little formality. It can be as easy as saying the wrong thing in a business meeting, sending an email without thinking or can even be implied by a course of dealings. If a partnership exists then others may have significant rights over how your business should be run and an entitlement to a share of any profit / assets.
The law that governs business partnerships was created over 100 years ago, in a less document heavy age. Despite many calls to reform this legislation, it is still possible to enter into a business partnership without any formal documentation. A partnership may be formed by people simply carrying on business together with a view to making a profit.
Unless the partners have agreed otherwise all the profits of the partnership will be split equally between them and each partner will owe the other partners a duty to account for any profits they receive from the business.
In the absence of an agreement, the law does not require the partners to share the work equally, or devote a set amount of time to the partnership. So it can be the case that a ‘sleeping partner’ can claim years worth of partnership profits, without lifting a finger. This can cause problems when the business has been built up over a number of years or if it includes valuable property, as any one of the partners can dissolve the partnership by giving notice. This can cause significant problems for the other partner(s) if they cannot reach an agreement in relation to the value of the partnership assets, or if they can’t raise the cash to purchase the exiting partner’s interest.
With this in mind it is advisable for any persons who are trading together to enter into a contract to formalise this relationship. If they intend to enter into a partnership then best practice is to enter into a formal partnership agreement, but if not (and so as to minimise the risk of a claim), an agreement should be prepared confirming the nature of the relationship and making it clear that no partnership is formed as a result of the business dealings.
A partnership is the simplest form of business relationship and can be entered into without any formality, but this can cause problems if the relationship is not documented properly or if the partners do not understand the consequences of the business relationship they are entering into. Even if they are not trading as a partnership, it is important that business people understand partnership law so that they minimise the risk of a claim being made by an unscrupulous ‘partner’.