16 March 2017

Make sure your agreement covers the essentials

Duration

In your partnership agreement you will need to consider the length of time your partnership will last for.  Partnerships will usually last indefinitely or for a fixed period of time set out in the partnership agreement.

A time restricted partnership may be one formed for a single venture or undertaking or for a specific set of events. It is then dissolved upon completion or when set criteria are met.

Capital 

This is one of the most important provisions in your partnership agreement. Capital is the sum that is contributed to the partnership by the partners. This is different to the value of its assets or its profits which can vary over time. Unless your agreement states otherwise, partners are entitled to equally share both the profits and the capital of the partnership.

Therefore if your partners do not provide equal contributions to the capital, it is important that this is reflected in your partnership agreement accordingly. A schedule stating exactly what each partner contributed to the capital and how they are entitled to then share the capital between them can be included in the partnership agreement.

Partnership property 

The partnership’s property should be clearly defined in your partnership agreement. Due to the significant value in property there needs to be a clear distinction between property that belongs to the partnership and property which belongs to you as a partner in your individual capacity.

This will prove to be particularly important when a partner leaves the partnership or the partnership dissolves or if the partnership ever becomes insolvent and is ordered to pay its creditors. It is important to define what is the property of a partner and what belongs to the partnership and how these assets are to be dealt with as this can cause significant issues if a dispute arises or a partner retires taking an important business asset with them.

Profits and losses 

The backbone of a partnership is the intention to carry on business to make a profit.  Therefore your partnership agreement needs to include a carefully drafted clause which clearly identifies how the partners will share the profits and losses. The default position provided by law is that all profits and losses will be shared equally. In practice, this will not always be appropriate.

An example of this is where partners who have been part of the partnership since its formation and have contributed significant amounts of capital into the partnership receive an equal proportion of profits to newer partners who have contributed very little capital and whose contribution to the business may be smaller.  It is important that you include a clause detailing how the profit and loss will be divided.

The procedure for admitting new partners 

As with any business, people will come and go and it is important that your partnership agreement provides for the admission of new partners. Unless you have provided for the admission of the new partner in the partnership agreement, the admission of a new partner will, under current law, require the unanimous consent of all partners.

The new partner will need to sign up to the partnership agreement either by way of a deed of adherence to it or by signing a new partnership agreement if changes to the partnership agreement are needed. You will need to consider how liability for acts and obligations of the partnership and/or individual partners are allocated, how much capital is to be contributed by incoming partners and what share of the profits they will receive.

Retiring, removing and appointing new partners

Importantly, without a formal agreement which provides for the retirement of partners, a partner cannot retire without dissolving the partnership. Most partnership agreements will set out a procedure for the administration of the departure of a partner which should cover matters such as how much notice should be given and how much he is entitled to receive in respect of his interest in the partnership and over what period he will be paid.

In addition, the Act also provides that even where every partner consents, an obstructive partner may not be removed unless there are provisions that allow this in the partnership agreement. Clearly, the inability to remove a partner who is not acting the best interest of the partnership or who has breached the partnership agreement could be extremely damaging to the partnership. It is therefore important to set out how a partner may be expelled and what the procedure is for dealing with this.

Otherwise, the partners would be left with a choice of continuing business with the partner they wish to remove or dissolving the partnership and starting again. This would result potentially in the partnership losing considerable goodwill they will have built up in their brand and could damage their reputation.

Management

We would also recommend that your partnership agreement deals with a range of management issues. The way this is dealt with will depend on the size of your partnership but matters to consider include the number of partners who are required for different types of decisions to be effective, how meetings are held, how decisions are made and other issues that may be relevant to your business.

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About the Author
Patricia MacKenzie, Senior Associate Solicitor
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