Exploring the importance of a partnership agreement and what to include in one
Business partnerships are regulated by a very old law known as The Partnership Act 1890. While the act does not regulate LLPs (limited liability partnerships) or limited partnerships, it is the basis of law for what are known as simple partnerships.
Under this act, a ‘partnership’ can be formed when two or more individuals come together in business with a view to sharing profits. This joining up can be established not only by an oral contract but also simply by conduct. It is possible, therefore, to enter into a partnership as defined by this act without intending to. Such inadvertent partnerships are referred to as ‘Partnerships at Will’ and are also governed by the act.
Due to the informal nature of such a partnership forming, there may not always be a written partnership agreement in place, which could become a problem when disagreements arise later between the partners. When this happens, the Partnership Act will apply, often with certain unforeseen consequences.
As businesses begin their recovery phases due to the ending of lockdown restrictions, a number of financial or non-financial issues might surface within partnerships, either because of financial difficulties, for example, or unauthorised drawings by partners.
Practitioners may encounter such issues themselves or in the businesses they serve, and would be well placed to ensure not only that a formal partnership agreement exists but also that it adequately deals with all the matters.
ACCA has brought you a factsheet on the importance of a partnership agreement and a helpful checklist of matters to include in one.
Along with that, practitioners should also review and ensure that letters of engagement are up to date to avoid any misunderstandings of the matters the accountant is responsible for and what matters the client should take responsibility for.
ACCA’s updated engagement letter templates should be used and can be adapted to fit a wide range of service offerings.