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: