Partnership Agreements and LLP Agreements

Top 20 Clauses

When forming and running either a general partnership or a Limited Liability Partnership (LLP) having a solid partnership agreement is essential. This agreement sets out the basic rules and guidelines on how the partnership will operate internally, handle finances, and manage relationships among the partners. This article highlights the key clauses that should be included in partnership agreements for both General Partnerships and LLPs.

1.Partnership Property

Defining what partnership property is versus personal property is essential. This clause clarifies the assets owned by the partnership, ensuring clarity on asset distribution and management during an unfortunate winding-up process or litigation.

If a partnership owns both office equipment and a personal car used by one of the partners, and there’s no clear distinction in the agreement, issues will arise as to whether the car should be sold to settle partnership debts or if it belongs to the partner personally. A clear definition helps prevent such disputes and ensures that assets are distributed according to the agreed terms.

2. Capital Accounts, Contributions, Increases, and Reductions

The agreement needs to clearly state how much money each partner will put into the business. It should explain how these financial contributions will be tracked and managed in the capital accounts. Additionally, the agreement must outline the procedures for adding more money to the business or withdrawing any funds. By doing this, it provides a straightforward plan for handling financial contributions and adjusting when needed.

To illustrate, suppose Partner A contributes £10,000 and Partner B contributes £5,000. The agreement should specify that these amounts are tracked in their respective capital accounts and detail how any future additional contributions or withdrawals should be handled.

Without this clarity, disputes could arise over the amount each partner is entitled to if additional funding is needed or if a partner wants to withdraw their share.

3. Current Accounts, Drawings, and Expenses

Regulating partners’ withdrawals (drawings) and the handling of partnership expenses is crucial for sustaining the partnership business. This clause ensures financial order and transparency, detailing how and when partners may draw from the partnership and how expenses are to be managed.

If Partner A regularly withdraws £1,000 per month for personal use, but Partner B doesn’t take any drawings, it could create friction. The agreement should set rules on how and when partners can make these withdrawals and how partnership expenses are covered to prevent disagreements and ensure fairness.

4. Profits and Losses

The agreement should establish a method for allocating profits and losses among partners. This ensures a fair and agreed-upon distribution, avoiding disputes over financial matters.

If a partnership earns a profit of £20,000 and Partner A is entitled to 60% while Partner B receives 40%. The agreement should specify this split. If not clearly defined, disagreements could arise over how much each partner should receive, especially if profits fluctuate.

5. Partners’ Obligations and Restrictions

Outlining the duties, limitations, and restrictions of each partner is vital for promoting accountability and clearly defining permissible activities. This clause helps manage expectations and responsibilities within the partnership.

To illustrate, if Partner A is responsible for handling marketing and Partner B manages finances, the agreement should specify these duties. If Partner A starts making financial decisions without authorisation, it could lead to conflicts. Clearly defined roles and restrictions prevent such issues and ensure each partner sticks to their agreed responsibilities.

6. Banking, Accounts, and Records

Proper financial administration requires detailed provisions for banking arrangements, accounting practices, and record-keeping requirements. This clause ensures that the partnership’s financial affairs are managed in a structured and transparent manner.

The agreement should state, for example, which bank accounts are used for partnership funds, how transactions are recorded, and who has access to financial records. If these details are not clear, it could lead to confusion or misuse of funds.

7. Managing Partner and Management Committee

The roles and responsibilities of key managerial positions, including the managing partner and any management committee, should be defined. This facilitates effective governance and decision-making within the partnership.

So, if Partner A is designated as the managing partner, their responsibilities and authority should be outlined. If the agreement doesn’t specify this, there might be conflicts about who makes strategic decisions or manages day-to-day operations, leading to inefficiencies.

8. Partnership Meetings and Decisions of the Partners

Establishing protocols for meetings and decision-making processes ensures structured and democratic governance. This clause provides guidelines for how decisions are made, and meetings are conducted which promotes orderly management.

For example, the agreement might specify that major decisions require a majority vote, and regular meetings are held quarterly. Without this clarity, decisions might be made unilaterally, or meetings might be disorganised, leading to disputes and poor management.

9. Admission of a New Partner

Specifying the criteria and process for admitting new partners is crucial for maintaining control and transparency. This clause outlines how new partners can join the partnership and the conditions under which they may be admitted.

An example would be if a new partner wants to join, the agreement should detail the approval process, and any financial contributions required. Without this, the existing partners might face unexpected changes or disputes about the new partner’s role and share.

10. Retirement, Expulsion and Provisions Relating to Death or Expulsion

It’s essential to detail the procedures and consequences for events such as a partner’s retirement, expulsion, or death to ensure continuity and fairness within the partnership.

For instance, if Partner A decides to retire, the agreement should specify how their share of the partnership is valued and paid out. Similarly, in the unfortunate event of a partner’s death, the agreement should detail how their share is to be handled.

Including an expulsion clause is particularly important; it identifies the circumstances under which a partner can be expelled from the partnership. Without such a clause, situations requiring a partner’s expulsion could lead to protracted court proceedings, creating significant delays and additional costs.

By clearly listing the conditions that would warrant expulsion, the partnership can avoid these complications, ensuring a smoother and more efficient resolution of such issues. Such detailed provisions help prevent disputes and ensure that the partnership’s affairs are managed effectively, evidenced in our article HERE.

11. Payments to and from an Outgoing Partner

This clause should outline the financial settlements required when a partner exits the partnership, ensuring fair compensation and clear obligations. It provides a framework for managing financial transitions.

For instance, if Partner B decides to leave, the agreement should specify how their share of the partnership’s assets is calculated and paid out. This prevents disputes over the amount owed and ensures a smooth transition.

12. Dissolution and Winding Up

The agreement should outline the process for dissolving the partnership and winding up its affairs. This clause ensures an orderly and equitable conclusion to the partnership’s business.

An example would be if the partnership needs to close, the agreement should detail how assets are sold, debts are paid, and any remaining funds are distributed among partners. Clear guidelines prevent confusion and ensure that the winding-up process is conducted fairly.

13. Amendment

The process for modifying the agreement should be specified to ensure that any changes are made transparently and with mutual consent. This clause provides a mechanism for updating the agreement as necessary.

To illustrate, if the partners agree to change the profit-sharing ratio, the agreement should outline how such changes are approved and documented. This prevents unilateral changes and ensures that all partners agree to modifications.

14. Members and Salaried Members

Distinguishing between different types of members, such as equity partners and salaried partners, ensures clarity in roles and compensation. This clause defines the status and entitlements of various members.

For example, the agreement might specify that equity partners share profits based on their investment, while salaried partners receive a fixed salary. Clear distinctions help avoid misunderstandings about compensation and roles within the partnership.

15. LLP Properties and Intellectual Property

Addressing the ownership and management of LLP properties and intellectual property protects the partnership’s assets. This clause ensures that the partnership’s intellectual property and other assets are properly managed and owned.

To illustrate, if the partnership develops new software, the agreement should specify who owns the intellectual property rights. Without this, disputes might arise over the ownership and use of such assets.

16. Net Profits, Drawings, Distributions, and Minimum Share

Regulating the distribution of net profits, drawings, and ensuring a minimum share for partners promotes financial fairness and stability. This clause outlines how profits are distributed and how partners’ shares are managed.

For instance, the agreement should state how net profits are divided among partners and ensure that each partner receives a minimum amount. This prevents disputes over profit distribution and ensures fair compensation.

17. Mediation and Arbitration

Establishing mechanisms for resolving disputes through mediation and arbitration promotes efficient and amicable conflict resolution. This clause provides alternative methods for addressing disputes without resorting to litigation.

To illustrate, if partners have a disagreement, the agreement might require them to first try mediation before pursuing legal action. This helps resolve conflicts more quickly and cost-effectively.

18. Unfair Prejudice and Further Assurance

To protect partners from unfair treatment and ensure that all necessary actions are taken to uphold the agreement, this clause safeguards against unjust practices and guarantees compliance with the agreement’s terms.

For example, if a partner feels they are being unfairly treated, this clause provides a way to address their concerns and ensure that all partners act in accordance with the agreed terms. It helps prevent unfair practices and ensures that the partnership operates smoothly. You might find our article Challenging Wrongful Exclusion an interesting read.

19. Attorney Appointment

An LLP partnership agreement must include provisions for appointing an attorney who can act on behalf of the partnership. This ensures that the LLP has designated legal representation when dealing with legal disputes, regulatory issues, or contract negotiations. Appointing an attorney clarifies who has the authority to make binding legal decisions and represent the firm’s interests in various legal settings. Without this, the partners could face confusion or delays during critical legal proceedings, risking adverse outcomes.

20. Entire Agreement

To confirm that the written agreement represents the complete understanding among the partners, preventing reliance on any external representations. The “Entire Agreement” clause is critical because it confirms that the partnership agreement represents the full understanding between the partners. It prevents any party from later claiming that external promises or verbal agreements were part of the deal. This clause ensures clarity and avoids disputes over what was agreed upon, helping to establish trust and protecting the partnership from misunderstandings. Without this, partners could potentially rely on informal or implied agreements, leading to legal uncertainties.

Both the General Partnership Act and Limited Liability Partnerships (LLP) Act provide default provisions to ensure smooth operations without specific agreements. For LLPs, these include equal profit sharing, majority decision-making, and mandatory indemnification of members. General partnerships default to equal management rights, profit and loss sharing, fiduciary duties, and indemnification for legitimate partnership actions.

For the full General Partnership Act click HERE and for the LLP Act click HERE

However, partners should tailor their agreements to address their unique needs and contributions. Custom agreements can address specific profit-sharing ratios, decision-making protocols, and roles, thereby fostering clearer expectations and enhancing operational efficiency. Failing to draft your own provisions means that default rules will apply, which can lead to disputes, operational inefficiencies, and potential litigation, thereby threatening the partnership’s stability and success.

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Christopher Burgon Solicitors Litigation Specialists

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WC1X 8AQ

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legal@christopherburgon.co.uk

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Top 20 Clauses

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