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The Importance of having a partnership agreement

Martin Brown of MocoMoney highlights the importance of having a comprehensive “Partnership Agreement” in place for dental partnerships of 2 or more. 

Many practices operate as a partnership and a partnership can come into existence without the parties realising. The definition of a partnership in law is “persons carrying on a business in common with a view to profit”. 

Therefore, two or more dentists working together with an expense share or profit share agreement will be in a partnership together. There is no legal requirement to have a written partnership agreement in place. 

However, without one you are will automatically be governed by the Partnership Act 1890. Considering the age of this legislation it is almost always incompatible with what you would want.

5 reasons to ensure a partnership agreement is in place:

  1. Under the terms of the Act, a partnership can be dissolved by one of the partners giving notice to the others. There is no minimum notice period and dissolution of a partnership can also be triggered by the retirement, bankruptcy or death of one of the partners. This clearly leaves the business in a very precarious position.
  2. If the partners receive differing profit shares. This is because the default position under the Act is that all partners are deemed to share equally in the profits of the business and to be equally responsible for its liabilities.
  3. Any property brought into or used in the partnership will automatically be owned by the partnership and therefore shared between the partners unless otherwise specified in an agreement.
  4. The Act does not place any restrictions on outgoing partners. Therefore, should a partner retire or be removed from the partnership, there will be nothing to stop that person from approaching the business clients or competing with it. 
  5. Under the 1890 Act the default position is that no person may be introduced as a partner unless every existing partner agrees. Similarly, you cannot expel a partner for bad behaviour unless all the partners have agreed a specific power enabling them to do this. Therefore, if there is no written partnership agreement, you may be stuck with a partner you wish to remove unless the partnership itself is dissolved.

Some of the important areas that a partnership agreement cover:

  1. Buy-sell rights
  2. Disability – what happens in the event of a partner’s disability
  3. Death – what happens in the event of a partner’s death. How do we protect the estate of the deceased dentist and how do we protect the surviving dentist from financial hardship?
  4. Compensation scenarios – unequal production numbers, unequal treatment days, cost control for procedures, etc.
  5. Majority/minority rights
  6. Financing issues

For more information get in touch with Martin Brown at MPB@mocomoney.co.uk