A guide to partnership agreements

Introduction

Communication and trust are key to any successful partnership. But even the most professional relationships need a solid legal foundation – one that clearly defines how your business operates, how decisions are made and what happens when things go wrong.

This is where a partnership agreement comes in. Whether you’re forming a new partnership or joining an existing arrangement, a well-structured agreement is essential for protecting your practice and making sure it continues running smoothly during times of change.

In this guide, we’ll explore why partnership agreements are so important, and how they can help future-proof your medical or dental practice.

What is a partnership agreement?

Put simply, a partnership agreement is a set of rules for how your practice should operate. It serves as a contract of employment for you and your partners, outlining important matters like:

• How partners are paid
• What happens during periods of annual leave or illness
• How disputes should be resolved
• How additional income streams should be handled
• How partners can exit the business

The main purpose of a partnership agreement is to protect your business, outlining the roles and responsibilities of each partner, reducing the risk of conflict and providing clear guidance when challenges arise.

Why is having a partnership agreement important?

Without a clearly defined and up-to-date partnership agreement, you could be leaving your practice open to a number of legal and financial risks.

This is partly because if you don’t have a formal agreement in place, your partnership will automatically be governed by the Partnership Act of 1890. If you do have a formal agreement in place, this Act will also govern any areas that are missing from the document.

While still legally valid, this historical legislation isn’t suited to the often-complex needs of modern medical and dental practices. For example, under the 1890 Act, a partnership can only normally only be dissolved by the death or bankruptcy of a partner.

So, if one of your partners needed to take long-term sick leave, they would remain legally entitled to their share of practice profits until they retire or pass away. This could cause significant issues for you and your remaining partners.

With this in mind, it’s important to make sure your agreement is tailored to the needs of your practice, overriding any outdated terms and ensuring your business is protected against unexpected circumstances.

What does a good partnership agreement look like?

A good partnership agreement should be tailored to the structure, goals and operational needs of your practice. While there isn’t a one-size-fits-all approach, your document is likely to include some of the following:

• Basic details – The names of all partners, the practice name and address, the nature of the business (e.g. medical or dental services) and the start date of the partnership.
• Financial contributions – How much initial capital each partner contributes, ownership shares and how future practice requirements will be funded.
• Roles and responsibilities – Clinical duties, administrative duties and agreed management structure.
• Working hours and leave – Expected working hours, holiday entitlement, sick leave or long-term absence.
• Practice premises – Ownership or lease agreements and responsibilities for practice upkeep.
• New and retiring partners – How partners can join and exit the practice, retirement age and notice period.
• Conflict resolution – How disputes are handled within the practice.
• Insurance policies – For example, dental indemnity insurance, partnership protection insurance and medical malpractice cover.

Once your agreement has been created, it’s also worth running it past a solicitor to ensure that the legal language used accurately reflects the intentions of your partnership. Otherwise, you could end up dealing with legal and financial consequences you aren’t prepared for.

Due diligence for new partners

If you’re joining an existing partnership, carrying out proper due diligence is key. It’s important to understand exactly what you’re signing up for – not just your day-to-day responsibilities, but also how the partnership will affect your income, entitlements and long-term financial planning. 

When you become a partner, you also become the co-owner of a business. This means that your income is directly tied to the profits of the practice, and your rights are determined by what’s written in the partnership agreement rather than by statutory employment law.

As you’re reviewing your agreement, there are some key questions to keep in mind:

• What is your holiday entitlement?
• How is sick leave managed?
• Can you take time off for CPD or study?
• Are there agreed terms for maternity or paternity leave?
• What happens if a partner retires?

Remember, your partnership agreement governs everything that you do within your practice. Taking the time to properly read it, ask questions and seek advice is one of the most valuable steps you can take before becoming a partner.

How often should agreements be reviewed?

A partnership agreement should be a 'living' document that is reviewed on a regular basis. It's up to you and your partners to decide when this happens, but certain events may require you to update the document sooner than scheduled:

• When a partner joins or leaves the practice
• A shift in business structure or goals
• Changes to the regulatory or legal landscape
• Disputes that arise under the current agreement
• Sourcing funding for practice renovation or expansion
• Liability concerns that require changes to risk management

Taking the time to assess whether your agreement is still fit for purpose can keep your business compliant, protect your interests and support the smooth delivery of the services your practice delivers.

What's more, having access to this agreement is essential for your personal financial planning. If drawn up correctly, it should provide clarity on key financial terms, future entitlements and potential liabilities - making sure your planning is based on facts, not guesswork.

With this guidance, you'll be better equipped to make informed decisions and achieve the best possible financial outcomes for you.