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LPC Law Notes Business Law and Practice Notes

Partnership Agreements Notes

Updated Partnership Agreements Notes

Business Law and Practice Notes

Business Law and Practice

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Partnerships

Partnership Agreements

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:

The Act Amendment in P. Agreement
Interest payments. Avoid S.24(4) which states that “partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him” Rules on paying interest need to be decided between the partners. Could allow on partner’s capital, before surplus profits divided.
Remuneration: S.24(6) provides that “no partner shall be entitled to remuneration for acting in the partnership business”. A partner who has no capital may decide that they need security of a salary in addition to profit shares. Salary can be differing amounts depending on experience / input of the partner. Salary t be paid before surplus profits paid out.
Profit sharing - S.24(1) – share equally state a suitable ratio – what is fair in the circumstances.

  • S.24(1) is thought NOT TO APPLY to post-determination of profits at the date of dissolution of the partnership. It is thought to only apply to income and capital profits and losses sustained during the performance of the partnership business up to the date of dissolution. Therefore specific provisions needed for dissolution.

  • What can be valued as capital? ‘experience / know how’ of a partner?

  • S.42 – payment to outgoing partner where there is no settlement after he leaves.

Types of profit share:

  1. Merit basis: based on how much each partner has billed / or performance / reviews. Decided on how much value does the partner bring to the business. Appropriate if there is a partner who has a lot of experience of a particular kind of work. [the rainmaker].

  2. Lock Step basis: Partners pay increases in accordance with their tenure as partner.

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:

Dissolution by NOTICE

  • S.26 – ‘Where no fixed term has been agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving notice of his intention so to do to all the other partners’.

AVOID a partnership-at-will!!!

  • If there is any limitation placed on a partner’s right to terminate the business by him alone giving notice – the partnership is...

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