Does your partnership have a formal partnership agreement and, if so, is it up to date?
It is extremely important to have a written agreement. Without a formal agreement the partnership is classed as a ‘partnership at will’, which means that it is governed by British law such as the Partnership Act of 1890. This being the case, any partner can dissolve the partnership on notice to the other partners. Dissolution of the partnership would result in termination of the PMS/GMS contract, staff would be made redundant and the bank could call in funding. In addition, all assets would have to be sold and the proceeds distributed. Furthermore, if the majority of the partners were unhappy with the performance of one partner, they would have no power to expel the unsuitable partner without dissolving the partnership.
Partnerships that don’t have formal agreements usually argue that there is no need for a formal agreement because the partners are all friends. However, it’s amazing how quickly friendship can become animosity when disagreements do arise.
Assuming that a partnership agreement does exist, it is important that it is reviewed on a regular basis to take account of changes in the way in which the partnership currently deals with matters such as prior shares of profits, and also to take account of changes in legislation such as the introduction of the new white paper. For example, agreements which were drafted many years ago and which haven’t been revised, will not include any reference to QOF income and how this should be dealt with if a partner leaves during the year.
A partnership agreement should set out the rules governing how the partnership operates and should cover all eventualities. The main issues, which should be covered, are as follows:
• Partners’ duties
• Normal working hours and holiday entitlement
• Financial arrangements regarding sick leave and maternity/paternity leave
• Decision making procedures and method of arbitration for unresolved disputes
• Where surgery premises are owned rather than rented, the proportions of ownership
• Profit-sharing arrangements and calculation of monthly drawings
• Partnership capital requirements
• A clear explanation of any income sources which are to be classed as the partners’ own personal income and, therefore, not included in the partnership’s accounts (for example, hospital appointments done in a partner’s own time)
• Reserves for taxation and superannuation liabilities
• Procedures to be followed upon the retirement or death of a partner. This should include the basis upon which assets are to be valued, whether to produce interim accounts or time-apportion the normal annual accounts, how to determine the proportion of QOF income to be reserved for up to the date of retirement, reserves for taxation and superannuation liabilities and possible future claw-back re abatement of seniority allowance.
• 24 hour retirement and right to rejoin the partnership
• Procedures to be followed in the event of a partner becoming disabled
• The right to expel a partner and the basis upon which this can be done
• Partnership accountants and preparation and approval of accounts
• Appointment of new partners
A model partnership agreement, setting out the main clauses that should be included, can be obtained from the British Medical Association. However, this pro-forma agreement should be regarded only as an aide memoire, and be amended to take account of each partnership’s own particular requirements. The actual partnership agreement should be drawn up by a solicitor, (preferably one who is experienced in acting for medical partnerships), but the draft document should be reviewed by the partnership’s accountants prior to being signed. This is to ensure that the procedures contained in the agreement do actual concur with the accounting practice currently being followed by the partnership.