The partnership we never wrote down, and the Act that wrote it for us

It usually starts well. Two people who are good at the same trade, or good at complementary halves of one, decide to work together. There is no company, no shares, no articles. There is a name, a bank account, some invoices, and an understanding — which is not written down, because writing it down at that stage feels like an accusation.

The belief underneath that is that until you formalise something, nothing is formal. It is the opposite of true. Under the Partnership Act 1890, a partnership exists whenever two or more people carry on a business in common with a view to profit. No paperwork is required to create one. If you are doing it, you are in one, and the Act supplies the terms you did not agree.

Those default terms are the problem. They are not neutral placeholders. They are specific, they are old, and in a modern small business several of them produce outcomes nobody would ever have signed up to on purpose.

What the Act writes for you

Four defaults do most of the damage.

Profits are shared equally. Under section 24, partners share equally in the capital and profits, and contribute equally to losses, unless agreed otherwise. Equally. Not in proportion to what each put in, not in proportion to who brought the work. If one partner put in £60,000 of savings and the other put in £5,000, they still own it half each. If one bills sixty hours a week and the other does two days, the split is still 50/50.

Nobody gets a salary. A partner is not entitled to be paid for acting in the partnership business. Drawings are an advance against profit share, not wages. So the partner doing more of the work has no default mechanism to be compensated for it before the profits are split down the middle.

Nobody can be removed. No majority of partners can expel a partner without an express agreement permitting it. Read that again, because it is the one that ends businesses. If your partner stops turning up, starts drinking the takings, or simply becomes impossible, there is no vote you can hold. You cannot remove them. Your options are to negotiate, or to dissolve the whole partnership — which means winding up the business you both built.

It ends on a death. Subject to agreement otherwise, the partnership is dissolved by the death of a partner. Not transferred, not continued. Dissolved. The surviving partner is left trying to keep trading through a dissolution while dealing with the deceased partner's estate, which now has a claim on a half share of everything.

A general partnership without a written agreement is not an informal arrangement. It is a contract with terms you have never read, drafted in 1890 by people who were not thinking about your business.

And then there is the liability

The defaults are the half of it that surprises people. The liability is the half that frightens them.

A general partnership has no separate legal personality. It is not a company. There is no corporate veil. In England and Wales, partners are jointly liable for the debts of the firm, and jointly and severally liable for its obligations arising while they are partners — which in practice means a creditor can pursue whichever partner has assets, for the whole amount, and leave that partner to chase the other for a contribution.

So your exposure is not limited to your share of the business and it is not limited to your own decisions. If your partner signs a lease, orders stock, takes on staff or makes a mess of a job, you are on the hook personally — house, savings, everything — for the consequences. Two people with an equal share do not have equal risk if one of them has a house and the other rents.

This is the single strongest argument for either a limited company or an LLP. It is not about tax. It is about whether a bad decision made by somebody else while you were on holiday can reach your personal assets.

The paperwork side, which is separate

Registration is a distinct obligation and people miss it because they think registering with HMRC as self-employed covers it. It does not.

The partnership itself must be registered with HMRC, by a nominated partner, using form SA400. Each individual partner also registers separately. The deadline is 5 October in the partnership's second tax year, and missing it risks a penalty.

The partnership then files its own return, the SA800, showing the firm's income, expenses and how the profit was divided. Each partner also declares their share on their own Self Assessment return. If the SA800 is filed late, each partner picks up a £100 penalty — so one partner's disorganisation becomes everybody's fine.

One further point that catches people: profit share for tax is what the partnership agreement says, not what actually landed in each bank account. If the agreement is silent and the Act's equal-split default applies, that is what is taxed, regardless of what the partners were actually drawing.

What the agreement should cover

It does not need to be long. It needs to answer the questions that will otherwise be answered by a Victorian statute or by a solicitor's letter.

How profits are split, and on what basis. Whether partners take a salary or prior share before profits are divided. What each partner is expected to contribute in time, capital and role. How decisions get made and what needs unanimity. What happens if a partner wants to leave, becomes ill, dies, or has to be removed — and specifically, an express power to expel. How the business is valued if someone exits, and how they get paid out. Whether departing partners are restricted from taking clients, which is the same territory as restrictive covenants in employment and needs the same care to be enforceable. And what happens to the name and the client list on a split.

If you are running a limited company rather than a partnership, the equivalent document is a shareholders' agreement and the same logic applies — what actually goes in one covers the ground.

If you are already in one

Most people reading this are not at the start. They are three years in, trading fine, with nothing written down. Two things are worth knowing.

First, you can put an agreement in place at any time, and it does not have to be a confrontation. The framing that works is administrative rather than adversarial: what happens if one of us gets hit by a bus, and does either of our families know what they would be entitled to? That is a question no reasonable partner objects to, and it opens every other clause behind it.

Second, do it while you still agree. An agreement negotiated when both partners are happy is a fair document, because neither knows which side of a future clause they will be standing on. An agreement negotiated when one partner has already decided to leave is not a negotiation, it is a settlement — and it is priced accordingly.

The cost of getting a straightforward partnership agreement drafted is a few hundred pounds. The cost of dissolving a functioning business because there is no mechanism to remove somebody who has stopped pulling their weight is the business.

Common questions

Do I have a partnership if we never signed anything?

Very possibly, yes. The Partnership Act 1890 defines a partnership as the relationship between persons carrying on a business in common with a view to profit — and it exists on the facts, not on the paperwork. No document, registration or declaration is needed to create one. Courts look at the substance: sharing profits, jointly making decisions, holding a joint bank account, presenting to customers as one business. That means two people who think they are just collaborating can be a partnership in law, with all the joint and several liability that carries. If your arrangement looks like a partnership and you did not intend one, that is a reason to get it documented urgently, either as a partnership or as something else.

Can I force my business partner out if things have broken down?

Not unless you have a written agreement giving you an express power to expel. Under the Partnership Act 1890 no majority of partners can expel a partner without such an agreement, and this is the default that most often traps small firms. Without it your realistic options are to negotiate an exit and buy them out, or to dissolve the partnership entirely and wind up the business — which usually means realising the assets and splitting the proceeds, not one partner simply continuing. There may be routes through the courts in serious cases, but they are slow and expensive. This one clause is on its own a sufficient reason to get an agreement drafted.

Is an LLP better than a general partnership?

For most partnerships where liability is a real concern, yes, though it comes with obligations. An LLP is a separate legal entity and limits members' liability to what they have put in, so one partner's mistake does not automatically reach the other's house. The trade-offs are that an LLP must be registered at Companies House, files accounts and a confirmation statement publicly, and needs at least two designated members. A limited company is the other route, with a different tax treatment. Which is right depends on your profits, your risk profile and how much disclosure you are comfortable with — it is worth an hour with an accountant before you choose.

What do we have to do about tax as a partnership?

Three separate registrations and two sets of returns. A nominated partner registers the partnership itself with HMRC on form SA400, and each partner registers individually as well — the deadline is 5 October in the partnership's second tax year, and missing it risks a penalty. The partnership then files an SA800 partnership return each year setting out its income, expenses and the division of profit, and each partner reports their share on their own Self Assessment return. If the SA800 is filed late, every partner receives a £100 penalty, not just the nominated one. The profit share reported is the agreed share, which is why an agreement that is silent leaves you taxed on the statutory equal split.