- Carry on any business which is within the same sector or competition with the target business being sold;
- Poaching customers, suppliers or employees from the target business; and
- Restrict the use of any intellectual property owned by the target business.
The main rights between partners in a general partnership are that they assume personal liability for the trading of the business. That liability should be properly covered with suitable insurance policies.
Partners are both the owners and managers of the business although there is usually a distinction drawn (in terms of rewards and responsibilities) between those partners who have put money into the business (equity partners) and those that are employees. However, when it comes to potential liabilities to third parties who deal with the partnership, no distinction is made between equity and non-equity partners.
That potential risk and other rights and duties should be covered off by way of a partnership agreement. In the absence of a written agreement then the Partnership Act 1890 applies and many of its provisions are outdated.
It is, therefore, best practice to have a written partnership agreement.
An LLP is a hybrid of a partnership and a limited company. The main distinction between an LLP and a partnership is that the owners of the LLP (members) do not assume personal liability. As the LLP is a separate legal entity it contracts with customers and suppliers.
The members that assume the management of an LLP are called Designated Members. The rights and duties of the LLP members should be set out in a Members’ Agreement. In the absence of a written agreement the LLP legislation referred to below will apply.
It is best practice not to rely on the LLP legislation and to have a written members’ agreement.
- Limited Liability Partnership Regulations 2001 Regulations;
- Limited Liability Partnerships (Application of Companies Act 2006) 2009 Regulations; and
- Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008.
Very definitely: Yes!
When a partner leaves a partnership, they hold knowledge and have relationships with customers, partners/employees and suppliers which are very valuable.
Restrictive covenants and confidentiality terms are designed to protect the partnership from a former partner taking confidential information, customers or employees to another business. Such clauses also try and protect the partnership from the ex-partner trying to interfere with the trading relationship the partnership enjoys with its suppliers.
In the absence of well drafted clauses in a partnership agreement it is almost impossible to protect a partnership from ex-partners taking steps that could damage the business of their former partnership.
2 or more persons associated for carrying on a lawful business with a view to profit must subscribe their names to the LLP’s incorporation document.
An LLP is incorporated by filing the necessary form (LLIN01) and paying the required fee at Companies House. That filing can be done either electronically or by using paper documents.
Filing and other formalities can be obtained from Companies House (www.gov.uk/government/organisations/companies-house).
A well drafted partnership agreement should contain some form of dispute resolution procedure which may, ultimately, result in one partner(s) buying out another partner(s). As the partnership relationship is based on personal liability it can be difficult to repair the business structure if there is a fundamental disagreement between the partners. Therefore, a mechanism which allows the partners to go their separate ways would be the preferred final solution.
In the absence of a partnership agreement, as stated above, the Partnership Act 1890 applies and there is little or no real provision in that legislation to facilitate the settling of disputes. Instead, the partners are left with the ‘nuclear’ option of dissolving the partnership. That is usually the last thing the partners want to carry out. Having said that, it can be a useful device to focus everyone’s minds to achieve a settlement, i.e. if notice of dissolution is given.
The main rights between partners in a general partnership is that they assume personal liability for the trading of the business. That liability should be properly covered with suitable insurance policies.
An LLP is a hybrid of a partnership and limited companies. The main distinction between an LLP and a partnership is that the owners of the LLP (members) do not assume personal liability. As the LLP is a separate legal entity it contracts with customers and suppliers.
Yes, there are 5 main ways to dissolve a partnership legally:
- Dissolution of Partnership by agreement
- Dissolution by notice
- Termination of Partnership by expiration
- Death or bankruptcy
- Dissolution of a Partnership by court order
Dissolution of Partnership by agreement
Partnership agreements usually include clauses and procedures for dissolving the partnership. The partners must comply with the agreement.
In many partnership agreements, a majority vote is not required to dissolve the partnership. If there isn’t such a clause, then all partners, unanimously, at the same time, must agree to dissolve the partnership. In other words, if partners agreed previously but then changed their minds, the partnership cannot be dissolved by agreement.
Dissolution by notice
If a partnership is at will, it is possible for it to be dissolved by notice. It is possible for a partnership to cease to be at will with very little effort.
There is a lot of complexity in the law. There are ways to establish a partnership that isn't at will.
- If one partner leaves, the partners will continue the partnership.
- A written partnership agreement.
- The partnership is a limited liability company.
Termination of Partnership by expiration
Where the time period expires or the contract ends the partnership is dissolved. Expiry is provided in the partnership agreement when it was formed.
The concept of expired does not exist for limited companies. The shareholders voted to have Companies House strike off the register of members. There is a similar process for LLPs.
Death or bankruptcy
Unless otherwise arranged, partnerships end at the death or bankruptcy of any partner. Partnerships should therefore have a formal partnership agreement that contains clauses allowing the collaboration to continue.
The Partnership Act is complicated if there isn't a documented partnership agreement and the remaining partners intended for the partnership to continue.
If the business trades as a Ltd company or an LLP, then the death or bankruptcy of a member does not cause the business to automatically dissolve.
Dissolution of a Partnership by court order
If the partnership were to dissolve by agreement, dissolution by the court would undoubtedly be contested. The court may dissolve a partnership if it finds that it is just and equitable to do so, for example, if there are only two partners and they have a falling-out; the business can only be operated at a loss; a partner is unable to operate the business, has engaged in conduct that negatively affects operations; is wilfully or repeatedly in violation of the partnership agreement; or acts in a manner that renders the agreement unreasonable.
An LLP agreement is a contract created by all the LLP members to formalise and record the commercial connection between them and certain operating procedures.
The agreement should cover the following areas:
- Management and voting requirements: a description of how the LLP will be managed, how voting weight will be determined, and whether unanimous or majority votes will be required to make important decisions about the finances and operations of the LLP
- Partner addition and withdrawal: the guidelines for how the LLP will handle the addition of partners, the voluntary withdrawal of partners, and the involuntary withdrawal of partners
- The rights and obligations of each member;
- Means of regulating each member’s investment in the LLP;
- Regulations for how company property is used and owned;
- How profits or losses will be shared;
- How the LLP is going to be governed;
- How critical decisions will be made.
Partners who are looking to move firms should be aware of any restrictive covenants and the length of these covenants. Usually partners would be subject to firm’s partnership deed. The typical restrictive covenants that can be expected to be found in the partnership agreements can include the following:
- a non-compete – preventing you from joining a competitor firm;
- a non-solicitation and non-dealing with clients – preventing a leaving partner from approaching clients or acting for them if they approached; and
- a non-poaching of colleagues – stopping a leaving partner from seeking to recruit colleagues.
Restrictive covenants for employees are normally only valid for a maximum of twelve months after termination. Contrarily, covenants for partners and LLP members may be substantially longer in term. There may also be "waiting room" clause to consider, which prevents partners from quitting a firm if a specific number of other partners do so within a predetermined time frame.
Depending on the role of a leaving partner within the firm, they can also be subject to fiduciary duties, which essentially requires to act in the firm's best interests rather than your own self-interest. Additionally, there might be a duty of secrecy that forbids a leaving partner from sharing private and client information with outside parties which would include any recruiters and any potential new firm.