Partnerships are a flexible and simple way to run your business, although they do not provide the same financial protections as companies. If you are setting up a partnership, it is highly recommended that the partners enter into a partnership agreement to describe the ground rules of the partnership, reduce the risk of future disputes and provide more flexibility. This guide provides more information about the benefits of a partnership agreement, and includes a customisable Partnership agreement template UK which you can use for your business partnership.
- Partnership agreement template UK: what it is and how to create your own
- Different types of partnerships
- Setting up a general partnership and using the Partnership agreement template UK
- Decisions, profit sharing and liability
- How should my partnership make decisions?
- How are the profits of my partnership divided under the Partnership agreement template UK?
- Do partners have the right to be paid a salary or receive any remuneration?
- How can drawings on the partnership bank account be approved?
- Can I be personally liable for the debts or losses of my partnership?
- Appointment or removal of partners and ending a partnership
- How can my partnership appoint a new partner? If the partnership has a written agreement, the necessary procedure or approval threshold required should be set out in it.
- How can my partnership remove or expel a partner?
- How can a partner retire or leave my partnership?
- How can I end a business partnership?
Partnership agreement template UK: what it is and how to create your own
What is a partnership agreement?
A partnership agreement is a legal contract entered into between business partners, which sets out how the partnership will run. Using a partnership agreement allows the partners to:
- set rules and procedures around how the partnership will be run;
- make the terms of the partnership clear from the outset, which reduces the risk of disputes in future; and
- have greater control and flexibility in how they run their partnership compared to the rules under default partnerships law (which apply if a partnerships agreement is not in place).
Do I need a partnership agreement template?
There is no legal requirement for a general partnership to have a written partnership agreement. However, in most cases, it will be in all partners’ interests to enter into a written partnership agreement. In the absence of a partnership agreement, a range of default provisions will regulate how your partnership is operated. These will often have undesirable or unintended consequences for your partnership business, particularly if a dispute or disagreement arises.
The only way to avoid having these default provisions apply to your partnership is to have your own agreement between the partners. For this reason, it is always important to consider entering into a written partnership agreement before you start doing business.
For a template partnership agreement you can adapt for use by your business, see Partnership agreement.
How do I use the Partnership agreement template UK?
- Check that all partners will be individuals (not companies or other legal entities) and be sure that you want to set up a general partnership (hint: you can find more information in this guide below about what a general partnership is);
- follow this link or the button above and click ‘Get Started’ to complete the guided questionnaire which customises your partnership agreement;
- download your Partnership agreement and review the terms to check you are happy with them;
- arrange signing by the partners as a deed and date the agreement (hint: We’ve included helpful guidance in the questionnaire to help you make sure it is signed properly); and
- keep your copies in a safe place.
What does a Partnership agreement contain?
Your partnership agreement should set out rules to help your partnership run smoothly, and to help resolve any disputes that might arise between the partners. There is no legal requirement for a partnership agreement to take a specific form, or to contain any compulsory provisions. However, most partnership agreements including our Partnership agreement template UK will cover things like:
- a name and description of the business to be carried on by the partnership;
- partners’ duties and responsibilities;
- how profits and losses are divided;
- when and how partners can retire or be expelled, eg for bad behaviour; and
- the obligations of the partners not to compete with the partnership for business.
Different types of partnerships
What are the main types of partnerships?
There are three main types of business partnership:
- General partnership (or ordinary partnership). This is the most common type of partnership for running a commercial business, with minimal formality required to set up and very limited filing and governance obligations. Our Partnership agreement template UK assumes this is the type of partnership you are setting up.
- Limited liability partnership. Also known as an LLP. This type of partnership is occasionally used by commercial businesses, but is much less common than general partnerships. An LLP must be registered at Companies House, and the ongoing filing and governance obligations are similar to running a company. You can find more guidance on LLPs here.
- Limited partnership. Also known as an LP. This type of partnership is very rarely used by commercial businesses. Most LPs are used by investment businesses or funds. You can find more guidance on LPs here.
Which type of partnership should I choose for my business?
General partnerships are most commonly used for commercial businesses, due to the minimal set-up costs, the flexibility, and the absence of any requirement to register and file information at Companies House. However, a general partnership is not its own separate legal entity. This means the partners will be personally liable for the bills and debts incurred by the partnership, potentially putting their personal assets at risk. The partners will also personally share (and be taxed on) any profits.
If partners want to limit their potential financial liability if things go wrong they could consider converting the partnership into a company.
LLPs and LPs are less commonly used for commercial businesses and detailed guidance is outside the scope of Sparqa Legal’s service. If you need specific guidance on setting up and running an LLP or LP, for access to a specialist lawyer in a few simple steps you can use our Ask a Lawyer service.
Setting up a general partnership and using the Partnership agreement template UK
How do I set up a general partnership?
A general partnership is established as soon as two or more people start a business together with a view to making a profit. There is no requirement for a partnership to be registered or even to be given a name.
Despite this absence of formal registration requirements, there are practical considerations you should always have in mind before starting a partnership business:
- make sure that a general partnership is the right vehicle for running your business;
- consider getting a written partnership agreement to regulate the relationship between the partners and set out everyone’s rights and entitlements. For a template partnership agreement you can adapt for use by your business, see Partnership agreement;
- choose a name for your partnership;
- meet your legal obligations to include the names of your partners on your stationery and at your registered office;
- choose a nominated partner and make the necessary registrations with HMRC;
- find out whether you need to register the partnership for VAT; and
- obtain any necessary business licences.
There is no need to notify Companies House when setting up a general partnership.
Conversely, the process for setting up an LLP or LP is more complex, and requires you to register at Companies House.
Note that you need to avoid setting up a business partnership by accident – see Starting a business partnership for more on how to avoid this.
How do I enter into a partnership agreement?
A partnership agreement can be made verbally or in writing. To avoid any dispute over the terms of your agreement, it is advisable to enter into a written partnership agreement.
Our template Partnership agreement is a deed, which should be signed by all partners in the presence of a witness.
What happens if I do not have a partnership agreement?
If you do not have a partnership agreement (either written or verbal), a range of default provisions will apply to your partnership. These broadly dictate that the partners will be jointly and equally responsible for controlling the partnership.
Examples of these default rules include:
- all partners having a right to share equally in the profits of the partnership;
- all partners being equally responsible to contribute to the losses of the partnership;
- all partners having a right to take part in management;
- all decisions to be made by a majority vote of all partners;
- no partner having any entitlement to remuneration;
- no new partners to be appointed without consent of all existing partners;
- no partner may be expelled from the partnership by the other partners;
- unless the partnership is set up for a fixed purpose or period of time, each partner having the right to terminate the partnership by serving notice to the other partners; and
- the partnership shall be terminated upon the bankruptcy or death of any partner.
As some or all of the above rules are likely to be undesirable, it is advisable to consider entering into a partnership agreement – see our template Partnership agreement.
Different rules apply to LLPs or LPs and you should obtain separate professional advice if you are thinking of creating one of these. For access to a specialist lawyer in a few simple steps, you can use our Ask a Lawyer service.
Decisions, profit sharing and liability
How should my partnership make decisions?
The way in which your partnership is managed and decisions are made should be set out in your partnership agreement. If you use our template Partnership agreement, you can choose how the partners’ votes are weighted when making decisions.
In the absence of any partnership agreement (either written or verbal), each partner has a right to participate in the management of the business and all decisions should be reached by a majority of the partners.
How are the profits of my partnership divided under the Partnership agreement template UK?
The way in which profits are shared between partners should be set out in your partnership agreement. In our template Partnership agreement, you can agree that profits will be shared equally between the partners, or set out the proportions in which the profits will be shared.
In the absence of any agreement (either written or verbal) on how profits should be shared, the default position is that they will be shared equally between the partners.
Do partners have the right to be paid a salary or receive any remuneration?
In the absence of any agreement (either written or verbal) on payment of salaries or remuneration, a partner shall not receive any pay in return for their work for the partnership.
The partners can agree to provide salaries and/or remuneration to partners in a partnership agreement.
Regardless of whether the partnership has a partnership agreement or not, partners may transfer their share of profits out of the partnership by making drawings from the partnership bank account.
How can drawings on the partnership bank account be approved?
The way in which drawings are approved, the amount that may be drawn, and the frequency with which they are made should be set out in your partnership agreement.
By using our template Partnership agreement, you are able to choose whether drawings can be made on a monthly or quarterly basis, and drawings made by a partner which are in excess of the annual profits they are entitled to must be repaid with interest.
Can I be personally liable for the debts or losses of my partnership?
Yes. The partners of a partnership are jointly responsible for its debts or losses. This means that if a partnership owes a lender £50,000, each partner is potentially personally liable to the lender for the full £50,000 debt.
Any obligation on partners to contribute towards debts or losses should be set out in your partnership agreement. If you use our template Partnership agreement, you can agree that profits and losses are shared equally or in certain proportions. However, all partners will still be jointly liable to third parties for losses.
In the absence of any agreement (either written or verbal) on how debts or losses should be shared, the default position is that the partners must contribute equally towards the losses incurred by the partnership.
Appointment or removal of partners and ending a partnership
How can my partnership appoint a new partner?
If the partnership has a written agreement, the necessary procedure or approval threshold required should be set out in it.
If you use our template Partnership agreement, anyone can be brought in as a new Partner by the unanimous agreement of the existing Partners, provided they sign a deed of adherence agreeing to be bound by the terms of the partnership agreement.
In the absence of any agreement (either written or verbal), a new partner can only be appointed if all existing partners approve their appointment.
How can my partnership remove or expel a partner?
You can only remove or expel a partner if the partners have expressly agreed that such a power to remove or expel a partner should exist.
Our template Partnership agreement sets out the circumstances in which a partner can be expelled by written notice:
- if they have fundamentally broken the agreement in a way that cannot be corrected, or, if the breach can be corrected, they have failed to do so in a reasonable time;
- a bankruptcy order is made against them;
- they have allowed their share of the partnership, or partnership property, to be used for separate debt; or
- their actions or failure to act has had a significant adverse effect on the partnership.
How can a partner retire or leave my partnership?
If your partnership does not have a written or verbal agreement in place, any partner may resign by providing notice to the other partners. However, this resignation will automatically cause the partnership business to be wound up.
This means it is nearly always best to enter into a written partnership agreement setting out a procedure for resignation and a right for the remaining partners to continue the business. Our template Partnership agreement contains such terms.
How can I end a business partnership?
If your partnership does not have a written or verbal agreement in place, a partnership can end either by the expiry of a fixed period of time, by completion of the purpose for which it was set up, or by any partner serving notice to end it.
If you have a written or verbal partnership agreement, the necessary procedure to follow (or events that trigger a winding up of the business) should be set out in it. In our template Partnership agreement, the partnership can be wound up by unanimous consent of all the partners. You can find more guidance on what happens to the cash, assets and debts of your business partnership when it is wound up in our Q&A.
Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.