Business Partnership Agreement (2 Partners)

Explanatory Notes

Business Partnership Agreement (Two Business Partners)

This Business Partnership Agreement is governed by English law.

General Introduction to Business Partnerships

Under the English Partnership Act 1890 ("PA") business partnership is defined as "the relation which subsists between persons carrying on a business in common with a view to profit". There are no specific legal requirements that govern the formation of a business partnership. The PA governs the relationship unless there is a Business Partnership Agreement.

Business partnership is a private matter and there is no public register that contains any information concerning business partnerships. (This is not true of limited liability partnerships which were introduced in 2002 in the UK).

The Legal Status of Business Partnerships

A business partnership does not have a separate legal personality apart from its members in a way that a limited company does. As a consequence, the business partners are jointly and severally liable for the obligations of the business partnership, i.e. each business partner can be sued for the full amount of any liability of the business partnership. There is no limit on liability.

The Duties of Business Partners

These arise from the Business Partnership Agreement, where there is one. In addition, business partners are both agents of the firm and their other business partners. They also have a fiduciary relationship to each other (e.g. a duty to account and disclose information concerning their activities in relation to the business partnership).

The Authority of Business Partners

Each business partner has the power to bind his/her business partners and make them liable on business transactions which are carried out in the name of the business partnership. (This power can be limited internally but if the internal agreement is breached, the business partnership might still have a liability to a third party who entered into a contract in the belief that s/he was contracting with the business partnership).

Why You Need a Business Partnership Agreement

The answer to this is that without a Business Partnership Agreement, there can be uncertainties as to the relationship between the business partners and how the business partnership should be run. For example, in the absence of a Business Partnership Agreement, on the death of a business partner, the business partnership has to be dissolved. This might not be in the interests of the surviving business partners who wish to keep the business partnership going.

Similarly, in the absence of any Business Partnership Agreement to the contrary, the business partners have the right to share equally in the capital and profits of the business.

Problems which can be encountered with the general law can be avoided by a properly drafted Business Partnership Agreement, which can set out clear rules concerning such matters as capital and profit shares, drawings on account of profit, management and decision making, permitted business partnership expenses, retirement and expulsion or death of a business partner (and the financial consequences of retirement, death or expulsion).

Clauses in this Business Partnership Agreement Download

Introduction

The introductory clause in this Business Partnership Agreement can be amended, depending on whether you are setting up a new business or whether the business partnership already exists but there is not yet any formal Business Partnership Agreement in place.

Definitions

This section of the Business Partnership Agreement includes the following:

1. The date to which the annual accounts are made up, and a brief description of the business.
2. The rate of interest payable on business partnership capital by the business partnership to the individual business partners. Since business partners frequently raise capital by borrowing from a bank, it is usual for the interest rate under a Business Partnership Agreement to be slightly more than the rate which each business partner has to pay to his/her bank.

The name of the bank to be included in the definition of interest rate will usually be a bank with which the business partnership has an account.

Establishment of the Business Partnership

This clause in the Business Partnership Agreement simply states the date on which the business partnership comes into effect. If it already exists, then the effective date of the Business Partnership Agreement will be inserted as per the second alternative.

Name of Principal Office and Property

This section of the Business Partnership Agreement includes the name of the business partnership and the address of the head office. It makes it clear that the premises of the business partnership (the "Property") and office furniture and equipment are held by the business partnership. Where the business partnership's premises or furniture/equipment are held in the name of one business partner it is made clear that the business partner holds that property in trust for the business partnership. If there is some other arrangement (e.g. one business partner owns the property where the business is carried on and charges rent to the business partnership), then this clause in the Business Partnership Agreement can be amended.

Capital

This section of the Business Partnership Agreement outlines the amount of capital each business partner has to contribute to the business partnership. The percentage contribution of each business partner is also shown, since this can be relevant if percentages are used in relation to voting rights.

This Business Partnership Agreement also makes it clear that any additional capital is to be contributed in the same proportions as the initial capital.

The Business Partnership Agreement also deals with the entitlement of the business partners to receive interest on their respective shares of capital.

Profits and Losses

It is usual for profits and losses to be shared in the same proportions as the capital contributions, but this is not always the case. This section of the Business Partnership Agreement includes the percentage share of each business partner.

If there are any expenses which business partners might incur but which are not to be treated as expenses of the business partnership, then this section of the Business Partnership Agreement can be amended accordingly.

Drawings

It is usual for business partnerships to arrange that each business partner can withdraw a regular monthly amount on account of his/her share of profits similar to a monthly salary. This section of the Business Partnership Agreement deals with this matter, and makes it clear that if there is not enough money in the account, drawings cannot be taken. Similarly, any business partner who withdraws more than his/her profit share for a year must immediately repay the surplus - with interest, if required.

Often, but not always, a business partnership will retain part of its profits to meet the anticipated income tax liabilities of each business partner and arrange for the business partnership's accountant to settle income tax liabilities with the Revenue & Customs. This section of the Business Partnership Agreement provides that where the tax liability of an individual business partner is less than anticipated the balance of any sum reserved is to be returned to that business partner. Similarly, where a tax rebate is received by a business partner in respect of business partnership profits s/he is obliged to repay that rebate to the business partnership. Advice from accountants is recommended on this clause in the Business Partnership Agreement and generally in relation to the financial aspects of the Business Partnership Agreement.

Business Partnership Loans

This section of the Business Partnership Agreement contains a reference to the possibility of one or both business partners making a loan to the business partnership and in that case, interest at the agreed rate will be payable.

This section provides that a loan must be repaid on notice - six months is suggested in this Business Partnership Agreement.

In practice, if any business partner does make a loan to the business partnership, it would be sensible to have a separate loan agreement dealing with these issues in more detail.

Conduct of Partnership Business

This is one of the most important sections of the Business Partnership Agreement as it deals with the day-to-day management of the business partnership, and how decisions are arrived at. The clauses included in the Business Partnership Agreement outline the following:

1. The frequency of meetings and who may call a meeting.
2. The procedures relating to meetings and decision making.

Whereas in business partnerships of three business partners or more business partners it is prudent to identify those matters that require the consent of all business partners and to distinguish such matters from those that may be agreed by a majority of business partners, this is inappropriate and impractical for a partnership of two business partners. So this section of the Business Partnership Agreement requires all matters relating to the business partnership to be agreed by both business partners. 

In addition to considerations of practicality, under the law, individual business partners have joint and several liability, i.e. a debt incurred on behalf of the business partnership by one business partner can result in either of the business partners becoming liable to the creditor for that debt. Unanimous agreement thus gives protection to both business partners.

Note that there is no provision in this Business Partnership Agreement for a business partner to appoint a proxy to attend meetings.

Good Faith

This clause in the Business Partnership Agreement sets out some general obligations on the business partners.

If either of the business partners is only involved on a part-time basis, or if a business partner has an interest in another business, then appropriate wording should be inserted in this section of the Business Partnership Agreement to make it clear that the particular circumstances are acceptable to the business partnership.

Restriction on Business Partners

Following on from the previous clause, this section of the Business Partnership Agreement imposes a number of specific restrictions on business partners: serious harm can be done to a business if one of the business partners, without any consultation, makes commitments to third parties, and this clause in the Business Partnership Agreement is intended to avoid those risks. This section of the Business Partnership Agreement also requires a business partner who fails to comply to indemnify the other business partners so that s/he does not suffer loss, i.e. to make good that loss.

Partnership Bank

This section of the Business Partnership Agreement ncludes the name and address of the bank and the signing arrangements.

Accounts

This clause in the Business Partnership Agreement provides not only for proper accounts to be maintained but also for a balance sheet and profit and loss account to be prepared each year. The firm's external accountants will prepare the annual accounts which will be signed off by the business partners. Adequate provision for reserves, etc. will normally be agreed on the recommendation of the accountants.

Holidays

Relevant details need to be included in this part of the Business Partnership Agreement. This clause in the Business Partnership Agreement may also be revised to provide for a business partner to receive maternity or paternity leave if required.

Insurance

It is important for every business to have adequate insurance in place. The list included in this section of the Business Partnership Agreement is indicative only and it needs to be tailored to your business. For example, professional indemnity insurance will normally only apply where the business partnership is a firm of professional consultants who might become liable for a negligence claim. If the partnership business is manufacturing, product liability insurance may be appropriate.

Note too that the obligation to insure property of the business partnership extends to property held in the name of one business partner in trust for the business partnership.

Termination, Retirement and Death

A fairly long notice period, usually at least six months, and sometimes as long as a year, is customary, when a business partner wishes to leave. For accounting reasons, it is helpful for the date of a business partner's retirement to coincide with the date of the end of the accounting year.

A compulsory retirement age is included in this clause in the Business Partnership Agreement. Careful thought needs to be given to the selection of a compulsory retirement age as the business partnership may face a claim for age discrimination. As a general rule, we do not advise opting for a compulsory retirement age under 65. Under the age discrimination rules introduced in 2006 in the UK, a business partnership does not, in fact, have any right to fix even 65 as a compulsory retirement age. Legal advice is recommended here.

Upon the death of a business partner the business partnership will be automatically dissolved.

A business partner who becomes bankrupt, commits a material breach of the Business Partnership Agreement, etc. can be required to leave the business partnership if the other business partner gives him/her notice. The consequence of this will be to dissolve the business partnership.

Consequences of Termination

This clause in the Business Partnership Agreement sets out the need for a set of accounts to be prepared on dissolution of the business partnership. The business partners will be entitled to whatever is shown as being due to them in those accounts.

Advice from accountants on the wording of this clause in the Business Partnership Agreement is recommended. The same accounting principles will be applied to the termination accounts as to the annual accounts.

Note that where business partnership property is held in the name of a business partner in trust for the business partnership the other business partner is given the option to purchase that property before it is put up for public auction.

Notices

The formalities required for giving notice under the Business Partnership Agreement are dealt with here.

Disputes, Deadlock and Governing Law

In a business partnership of two business partners it is advisable to have a formal means to resolve any potential deadlock.

This clause in the Business Partnership Agreement provides for either a two or three-stage dispute resolution process - negotiation, mediation and, finally, should the parties agree to include this option, arbitration. Ultimately, if at the end of the deadlock procedure the business partners are still unable to reconcile their differences, the only realistic option is for the business partnership to be dissolved.

An alternative to arbitration is to refer the dispute to the courts but in the case of a business partnership, litigation between business partners could attract publicity and damage the business - arbitration offers a confidential way of dealing with major disputes

Entire Business Partnership Agreement

This clause in the Business Partnership Agreement makes it clear that any previous business partnership agreements or other arrangements agreed between the business partners are of no effect once the Business Partnership Agreement has been signed.

Severability

Includes a "Boilerplate" clause which deals with the possibility of one of the terms of the Business Partnership Agreement becoming invalid for some reason.

Waiver

Includes another "Boilerplate" provision, which makes it clear that if one of the business partners is let off the hook, even if s/he has committed some breach of the Business Partnership Agreement, that will not prevent the other business partner from later taking whatever action is allowed under the Business Partnership Agreement.

Signature

Each business partner should sign the Business Partnership Agreement in the presence of an independent witness. Assuming each business partner wants a signed copy, two copies of the Business Partnership Agreement in its final form should be prepared and signed by both business partners and witnessed.

Note that it is usual in England & Wales for a business partnership agreement to be signed as a Deed – in which case the signature clause in the Business Partnership Agreement should be worded to this effect – and wording is included in this Business Partnership Agreement for you to do so. A Deed is a document that is legally binding even if there is no consideration. It used to require the seal of the signatory to be affixed, but nowadays all it requires is an independent witness who should sign after the signatory and then add his/her address and occupation. The same individual can witness more than one signature.