Business Partnership Agreements: What Happens Without One

Sarah and Dev ran a Bristol design studio together for six years without a single written rule. Sarah brought in most of the clients and worked sixty-hour weeks; Dev kept the books and left at five. When they finally fell out, Sarah assumed the profits would reflect all that extra work. Then a solicitor explained that, with no partnership agreement, a law passed in 1890 split everything straight down the middle. The document you write while you still like each other decides what happens when you do not.

If you have no written agreement	What the default law says
Profits and losses	Shared equally, whatever each partner contributed
Salary	None for any partner
Admitting a new partner	Needs every partner to agree
Expelling a partner	No power to do it
A partner dies or goes bankrupt	Partnership is dissolved
One partner wants out	Can end a partnership at will by giving notice

No agreement means an 1890 law makes the rules

If two or more people run a business together for profit and never write anything down, in England and Wales they are almost certainly in a general partnership governed by the Partnership Act 1890. That law fills every gap with defaults written for Victorian merchants. Profits and losses are shared equally. Nobody draws a salary. Everyday decisions go by majority, but changing what the business does or bringing in a new partner needs everyone to agree. A partnership with no fixed term can be ended by any partner simply giving notice. None of these rules is unreasonable on its own. The problem is that almost nobody knows they apply until the moment they turn against them.

Profit, pay and the money you each put in

Sarah’s shock is the most common one. Equal profit sharing ignores who works harder, who brought the clients and who put in more cash at the start. A written agreement fixes this in plain terms: each partner’s profit share, any fixed salary or “prior share” paid before profits are divided, how much each can draw each month, and what happens to the capital each person contributed. That last point matters more than people expect. If Dev put in £20,000 and Sarah put in nothing, is Dev repaid first when the business ends, or is it simply part of the pot? Decide it now. Separate who owns the business from who does the work, because those are two different questions.

Why being a partner can put your house at risk

This is the part that keeps careful people awake. In a general partnership, partners are personally liable for the firm’s debts, and one partner can bind the whole business to a contract made in the normal course of trade. If Dev had signed a disastrous lease, Sarah could have been chasing the rent from her own savings. An agreement cannot remove that liability to outsiders, but it can limit who is allowed to sign what, set spending caps, and give partners a right to be repaid by the one who broke the rules. If the risk worries you, it is worth weighing up the difference a limited company makes before the business grows any bigger.

Fifty-fifty works right up until it does not

Two equal partners who disagree have no tie-breaker. Nothing gets decided, and a business that cannot make decisions slowly dies. A good agreement spells out which decisions need unanimity and which a majority or a named partner can take, then sets a ladder for genuine deadlock: talk, then mediation, then a final mechanism. The best known is a shotgun clause: one partner names a price for the other’s share, and the other must either sell at that price or buy at it. Because you might end up on either side, it forces an honest number. It is blunt, but a blunt clause agreed in advance beats a court case in year seven.

When a partner wants to leave, or needs to be removed

Here is a default rule almost nobody believes: without an express clause, there is no power to expel a partner, however badly they behave. Equally, a partner in a partnership at will can walk out by notice and potentially trigger the end of the whole business. The agreement should set a proper retirement notice period, define good and bad leavers, and, above all, agree how a departing share is valued and paid — lump sum or instalments, and over how long. Add reasonable restrictions on poaching clients and staff. If the shares sit in a company rather than a partnership, the same thinking belongs in the founder vesting and leaver terms on your cap table.

Death, illness and the clause nobody wants to write

Under the 1890 Act, the death or bankruptcy of a partner dissolves the partnership unless you have agreed otherwise. That can leave the surviving partner winding up a healthy business while also negotiating with a grieving family who now own half of it. The agreement should say the business continues, how the deceased partner’s share is valued, and how it will be paid for. Many partners fund this with a cross-option agreement backed by life or key person insurance, so the money exists when it is needed. Long-term illness deserves the same planning. It is an uncomfortable conversation, and it is part of managing business risk properly — and closely tied to succession planning.

LLPs and companies need written rules too

Switching structure does not remove the need for an agreement. A limited liability partnership protects members from the firm’s debts, but the Limited Liability Partnerships Regulations 2001 still supply defaults if you have no members’ agreement: capital and profits shared equally, every member entitled to take part in management, and no majority able to expel anyone without an express power. A limited company runs on its articles of association, and most small firms with more than one owner also need a shareholders’ agreement covering the same ground. If you are about to incorporate, agree it at the same time you register the company. In Scotland partnership law works differently, so take local advice there.

What to put in yours, and when to review it

A useful agreement covers roles and time commitment, authority to sign and spend, profit shares and drawings, capital, which decisions need everyone’s consent, a deadlock ladder, exit and valuation, death and incapacity, restrictions after leaving, and mediation before court. It is a contract like any other, so the basics in our guide to business contracts apply. Review it whenever something significant changes — a new partner, a big investment, a change of roles — because an agreement that describes the business you had three years ago can be almost as unhelpful as none at all. Your accountant can check the money clauses; a solicitor should draft the rest.

What Sarah and Dev did next

They did not go to court. Sarah bought Dev out using a valuation both accountants could live with, paid over three years, and she now runs the studio with a new partner — under a twelve-page agreement signed on day one. She says it took two awkward evenings to agree and has saved her countless awkward months since. That is the real value of a partnership agreement: it is not a sign of distrust, it is a record of what you both meant while you still agreed about it. If you are in business with someone else and have nothing in writing, this week is a good week to start. And if the day ever comes to sell, the same discipline makes planning an exit far easier.

Frequently asked questions

What is a partnership agreement?

A written contract between business partners setting out profit shares, roles, decision-making, exits and what happens on death, so the law’s defaults do not decide instead.

What happens if partners have no written agreement?

In England and Wales the Partnership Act 1890 applies: equal profit shares, no salaries, unanimous consent for new partners and no power to expel anyone.

Can a business partner be expelled?

Only if the partnership or LLP agreement expressly gives that power. Without such a clause, a majority cannot force a partner out.

What happens to a partnership if a partner dies?

Without an agreement saying otherwise, the partnership is dissolved. A written agreement can keep the business going and set how the share is bought.

Are business partners personally liable for debts?

In a general partnership, yes. Partners can be personally liable for the firm’s debts. LLP members and company shareholders generally have limited liability.

What is a shotgun clause?

A deadlock tool where one partner names a price and the other must either sell their share or buy the first partner’s share at that price.

This article is general information about the law in England and Wales, not legal advice. Partnership, LLP and company rules differ in detail, and Scotland has its own partnership law. Take advice from a solicitor before drafting or relying on any partnership or shareholders’ agreement.