Partnership Agreements

We are specialist partnership solicitors able to solve problems for partners or partnerships alike. We offer a high level of expertise whether you are joining, managing, operating or leaving the partnership.

Please do call us to discuss your query.  We will always scope any work and provide an estimate giving you clarity on the likely path and legal fee costs.

Reasons for picking us

You can rely on our knowledge of partnership law for the delivery of the commercial dexterity needed to put plans into action. We have a strong track record.

  • We review partnership and LLP agreements and highlight any areas which could turn into issues in the future.
  • We have particular expertise in managing partner departures, insolvency and dissolution of partnerships.
  • Resolution of partnership disputes is a familiar area for us. Over the years we have amassed valuable know how and we apply that knowledge to best effect to help you achieve your objectives.
To help you we have summarised some of the partnership law questions we are commonly asked:

Obligations and powers of a partner

Partnership law gets complicated because there are three different types of partnerships that can be operated in the UK. The obligations and power of partners varies under each type of partnership.

The laws relating to partnership do vary depending upon the nature of the partnership.  There are three types of partnerships recognised in law:

  • Limited liability partnerships – having their own legal identity quite distinct from that of its partners or members;
  • Partnerships where the liability of partners is not of limited liability but there is a written partnership agreement – governed by the Partnership Act unless the agreement provides otherwise; and
  • Partnerships which are not committed to writing – there is no separate legal identity between the partnership and the partners in law and the partnership will be governed by the Partnership Act.

Partnership or LLP?

The ownership and decision-making processes in both types of partnership are broadly the same. The key differences relate to liability and filing requirements.

Filing and formalities

A partnership does not need to be registered. Nor does it need to file anything at Companies House. The accounts remain private.

In contrast, an LLP must be registered and must file its annual accounts at Companies House, which are then publicly available.

Liability

In a partnership, the partners are jointly and severally liable for the debts of the partnership. This liability is unlimited and means that a creditor can pursue each individual partner for the full amount owed. Partners also owe duties to each other.

An LLP exists as a separate legal entity. This means that the member’s liability is limited to the input contributed or amount agreed in the LLP agreement – they are not liable for the LLP’s debts. Members owe duties to the LLP.

The obligations and powers of partners will vary depending upon which of the three types of partnerships they are engaged by.  Details of any written partnership agreement are also important.  We often see that a partnership agreement never quite covers the problem we are solving. In these cases we rely on case law and statue for authority.

The typical issues encountered in partnerships and LLPs where the obligations owned by partners becomes important include:

  • Handling member departures from a partnership – voluntary and involuntary. This includes how to deal with capital payments on the departure of a member.
  • Enforceability of post termination restrictions and covenants for partners. This often arises if a departing member sets up in competition and/or takes clients.
  • Dealing with claims for employed status brought by partners against the partnership. This often arises if a departing member has been sacked or turned over for promotion in circumstances they consider to be unfair.
  • Taxation of members’ drawings. The question is can they be treated as self-employed in the eyes of HMRC?

Who is a partner?

There is no statutory definition of partner, or member of a common law partnership, or LLP. The mere sharing of profits with others is not regarded as conclusive evidence that a member is a genuine partner. But that fact taken together with other relevant circumstances could lead to that conclusion.

Can a partner be an employee?

It is necessary to look below the surface and understand the relationship between the individual and the partnership or LLP. The fact that someone is held out as a member does not necessarily mean that they are treated as members for all purposes.  A partner can have more than one status with different implications flowing:

  • Status for employment law purposes;
  • Status for tax purposes; and
  • Status within the partnership for commercial purposes.

The name given does not in itself determine status

A whole range of factors needs to be taken into account to determine status for employment law purposes.

Factors to consider in determining if an individual is an employee or a partner include:

  • Whether the individual receives a fixed remuneration payable irrespective of the partnership profitability and whether they have a share of the profits and losses of the firm.
  • Whether they receive an express or implied indemnity against debts and liabilities of the partnership from other members, or merely a contribution towards those owed to third parties.
  • Whether they are required to make a capital contribution, or are entitled to share in the partnership’s surplus assets.
  • The level and extent of the right to participate in management decisions, management meetings and partnership votes.
  • Whether the individuals name appears on all partnership documentation, they have the right to hire and dismiss partnership employees and whether they have banking authority.
  • Whether they are “carrying on a business” with a view to profit.

Control over members of a partnership or LLP

The issue of control has for a long time been regarded as an important consideration when considering the obligations. The greater the power to command and control the partnership (such as through the partnership vote and participation in management), the more likely that an individual will be regarded as a partner. Conversely, the less that an individual has power and rights, the more likely they are to be an employee.

Indictors of employment status

The following pointers do suggest the partner is an employee:

  • The individual agrees that, in consideration for a wage or other remuneration, they will provide services for the partnership.
  • The individual agrees, expressly or impliedly, that in the performance of that service they will be subject to the control of the partnership and its partners.
  • The other provisions of the contract are consistent with it being akin to an employment relationship.

Restricting a partner’s activities

The status of the partner comes into play when considering the enforceability of a restrictive covenant. A typical restrictive covenant found in a partnership agreement or an LLP agreement will deal with:

  • Working for a competitor within a specified geographical area.
  • Soliciting or canvassing clients, customers, or suppliers.
  • Soliciting or employing other partners and staff.
  • There may also be restrictions which seek to prevent team moves by stating that for a specified period following departure a member cannot join a firm to which another member from the original firm has recently transferred. Such provisions have not yet been tested in the courts, but are used to prevent multiple departures, predominantly relied on by professional service firms where the clients are the business.

If the partnership agreement has set out the restrictions and the member has agreed to be bound by them there is less room for doubt.

Silence in the partnership agreement

The main difficulties arise when nothing has been documented.  Surprisingly often the case. Where the partnership agreement is silent the starting point for construing all post-termination restrictions and covenants, whether against members or employees, is that they are void on the grounds of public policy unless they are:

  • Reasonable in the interests of the parties.
  • Reasonable in the interests of the public.
  • Necessary to protect a legitimate business interest such as trade secrets or business connections.
  • Go no further than is reasonably necessary between the parties to protect that interest.

Restrictive covenants in employment contracts are often open to challenge because of the inherent inequality between the bargaining position of the employee and employer. The position of partners is different. The courts consider that there is no imbalance in bargaining power between members of a partnership or an LLP.

No implied term

Where no restrictive covenant exists and there is no fiduciary relationship between the partner and the partnership or the member and the LLP once one leaves.

Garden leave

A garden leave clause in a partnership agreement may suspend the right of departing members during their notice periods. Garden leave clauses typically restrict matters such as attending the office, undertaking client work, participating in marketing activities, attending partners’ meetings, retaining senior management functions and speaking to clients and staff about their departure.

No implied term

In the absence of an express right to do so, the general view is that it is not possible to place a partner on garden leave as, either directly or indirectly, their profit share will be affected by his ability to work.

Discrimination

While members do not qualify for employment protection rights they have the same right as employees to be protected against unlawful discrimination on grounds of:

  • Sex, marital status, civil partnership, gender reassignment and pregnancy or maternity.
  • Race.
  • Disability.
  • Sexual orientation.
  • Religion and belief.
  • Age.

Retirement

Compulsory retirement is not always discriminatory.  The position is clearer if there is a written partnership or LLP agreement setting out the terms.

Are the partners really self employed for tax?

Partners who can establish they are self employed for tax purposes will pay less overall tax than the equivalent employee. But, HMRC have clamped down on abuse.

Anti avoidance legislation

HMRC has laid down strict conditions to be satisfied in order to be treated as self employed for tax purposes. To be treated as self employed a partner of any partnership must satisfy at least one out of the following three tests.

1. Disguised salary

Disguised salary means that at least 80% of member’s drawings are either fixed or variable but varied without reference to the overall profitability or loss of the partnership. If the salary depends on the performance of the partner or performance of a business division HMRC will consider the salary as fixed as it does not vary by reference to the partnership overall. It is the sharing of losses which we often find causes problems.

2.Significant influence

Significant influence means that the member’s rights and duties do not give the member significant influence over the partnership affairs. If a partner has influence over one part of the business, e.g. Head of Finance, that is not enough. Most partners of larger professional firms do not meet this criterion.

3. Capital contribution

Capital contribution means that the member’s capital contribution to the partnership is less than 25% of the disguised salary that is reasonably expected to be payable to him for his services for the tax year. The capital contribution position needs to be reconsidered by the partnership each year. This is because as the profits go up the profit entitlement of the partner might be larger than four times his capital contribution, making him a salaried member during the tax year. HMRC will use anti-tax avoidance legislation to tax artificial and short-lived increases in partners’ capital contributions used to avoid tax.

Planning on how the partner operates and contributes before there is an HMRC investigation will help.

There are further rules where the partnership includes a member who is a limited company.  The idea is HMRC can attack the use of companies to reduce the overall tax burden for partners.

  • Gannons were really helpful with my claim for employment rights when I was dismissed from a partnership. I got the result I needed thanks to their well structured arguments.

  • Gannons paid particular attention to restrictive covenants when drafting our partnership agreement. They appreciated the unstable nature of our industry and the need to protect the business when partners leave.