Why have a partnership agreement or shareholders agreement?

6 November 2025 | Business & Workplace |

Whether you make an agreement or not, forming a business will automatically have consequences in law. For companies, the relevant law is contained in the Companies Act 2006 and partnerships fall under the Partnership Act 1980. Both pieces of legislation set out clear rules for the structure, conduct, duties and obligations of shareholders, partners, and anyone else involved in a business (such as directors).

However, in the UK, we are generally allowed to conduct business freely and the default laws on companies and partnerships do not necessarily apply to the realities of our individual circumstances. For example, by forming a partnership without an agreement:

• All partners are jointly for the debts of the business, including being jointly and severally liable for the wrongful acts or omissions of the other partners in the course of business
• Similarly, each partner is equally entitled to the profits of the business
• Each partner has a right to participate in the management of the business unless decided otherwise by majority agreement
• No partner can be removed unless all agree If one of the partners dies or become insolvent, the partnership automatically dissolves
• There are no restrictions on the actions of partners after they leave the partnership, such as constraints on whether former partners can approach customers independently

By forming a limited company without an agreement, there’s uncertainty about:

• How day-to-day decisions will be made
• What happens when shareholders leave the business
• How the shares are to be valued
• Whether other shareholders have the right to buy the shares of a departing member
• Whether shares can be sold to third parties after a member departs

By having a shareholder or partnership agreement, you can redefine the relationships between key stakeholders under a legally binding contract.

Partnership agreements and shareholder agreements can protect minority shareholders, correct many of the less beneficial aspects of forming a business, and answer outstanding questions about how the business is to be run.