#3249 - Partnership Agreements - Business Law and Practice

Drafting a Partnership Agreement

1. Definition of partnership agreement: It defines the powers, rights and duties of the partners within the partnership. (The terms of a contract).

Always advise client to have a written agreement – avoid implied provisions.

2. Commencement date – partnership is established as soon as S.1 definition is satisfied. But it is desirable to specify a commencement date from which parties regard their mutual rights and responsibilities as taking effect.

3. Name – state the name so it becomes fixed term of the contract and therefore a party can dispute its amendment as a matter of contract.

4. Financial Input (capital): How much will each partner contribute & address question of future increases in contributions if such increases are anticipated.

Future capital contribution: can be by cash / non-cash assets.

5. Shares in income profit / losses:

• Implied S.24(1) - AVOID

• How to divide profits:

6. Drawings: agreement could state a monthly limit on how much each partner can withdraw from business in respect of his share of profits.

7. Partnership property:

• S.20(1) implies: partnership property = property bought for the purpose of the business

• S.21 implies: any property bought with partnership money is partnership property.

• State how property is owned and / or how partnership property is to be defined. (i.e. put in writing what is partnership property?)

• Asset-surplus sharing ratio (Shares in increases / decreases in asset values): if a fixed asset in a partnership is sold – agreement should state how the increase / decrease in value is to be shared between the partners. (if not stated – PA will imply equally). Maybe partner who contributed more capital should get a greater share of any gain?

8. Place and nature of business:

• S.24(8): “Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners”.

9. Work input:

• S.24(5) ‘Every partner may take part in the management of the partnership busines’s – could lead to some partners claiming compensation for their extra work if there is a neglect of this duty.

• Therefore, agreement should set out degrees of work expected from each partner.

• Roles: what is each partner’s function? Do they have differing roles? Whatever is agreed is binding and ignoring this would be breach of contract.

10. Decision making:

• S.24(5) ‘every partner may take part in the management of the partnership business’. Should this change?

• S.24(7) and (8): all decisions by simply majority except changing nature of business (8) and introducing new partner (7). Good to keep this un-amended.

• S.19 PA: consent of all partners (express or inferred consent) needed to disapply the provisions in the agreement. [The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing]

• Partnership Agreement may want to impose tighter controls on management of the business – so certain decisions are taken by unanimous vote rather than majority.

• Should there be a casting vote?

11. Duration of partnership:

12. Retirement: PA 1890 does not provide for retirement.

• Partnership and The Equality Act 2010 (“Age discrimination legislation”) – be aware of age based compulsory retirement clauses. They must be justified.

13. Expulsion: PA does not provide for expulsion.

• Occurs at the instigation of the other partners.

• S.25 – all partners must agree. ‘No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.’

14. Payment for outgoing partner’s share:

• Agreement should contain appropriate term to cover the situation that when a person ceases to be a partner (retirement, expulsion, bankruptcy, death) the other partners continue in the partnership by paying for the outgoing partner’s share in the business.

• Avoid operation of S.42 PA on dissolution of the partnership. If there was no settlement between partnership and out-going partner, then he / she / estate is still entitled to a share of the profits: Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent. per annum on the amount of...