A partnership may come about in many forms. It may be by chance or it could be the product of deliberate and careful planning. One factor that may be overlooked by young entrepreneurs is the need for a partnership agreement. This is often overlooked because, many times, the intending partners may be acquaintances or friends with a history of a cordial relationship over a period of time.

Even when they are strangers, they may consider themselves to have enough integrity to proceed without any formal partnership agreement drawn up. A partnership agreement is necessary not because the parties lack integrity, but because sometimes, the law makes certain presumptions which may not necessarily accurately reflect the position of the parties.

Thus, the parties owe it to themselves to expressly set out the terms which will govern their business relationship and accurately reflect their peculiar positions. Also, a partnership agreement gives certainty and clarity which are indispensable for the successful running of a business. Certainty and clarity which are fostered by a partnership agreement greatly reduce the occurrence of strife and conflict, and where they occur, it provides an avenue for their smooth and speedy resolution.

Whether it is a limited Partnership, a limited liability Partnership or a general partnership, a partnership agreement remains very important for the successful running of the partnership business. This article will emphasise the importance of a partnership agreement by highlighting some of the presumptions the law will make in the absence of one. It will also draw attention to someimportant issues that ought to be addressed by a partnership agreement.

In the absence of any agreement or statement to the contrary, the law will make the following presumptions:

  1. Every partner is deemed by law to be an agent of the partnership and all the partners and can bind them in contract. There is therefore a presumption that a partner can bind all the partners in all matters in relation to the firm’s business, in the absence of any agreement spelling out the extent and the matters in respect of which a partner has authority to act for the partnership.[1]
    For example, in a partnership firm whose sole business is the production of agricultural tools, a partner may not have the technical knowledge which may be required to negotiate deals regarding the production of tools, but may have expertise in finance. It is therefore best that the partnership agreement spells out the matters in respect of which each partner may act on behalf of the firm. It may be best to limit partners’ authority to act to their areas of expertise.
  2. All partners are presumed to have contributed equally to the capital of the partnership. Based on this presumption, profits and losses are required to be shared equally by all partners. If there is no partnership agreement expressly spelling out the rules governing the sharing of profit and loss, then the profits and losses of the firm must be shared equitably.
    [2]The reality is that, sometimes, partners may not all make equal contributions. Where one partner contributes more money to the firm’s capital, it should be reflected in the partnership agreement and such a partner should be entitled to higher profits. This underscores the importance of a partnership agreement.
  3. In the case of a general partnership, there is a presumption that all partners are at liberty to take part in the management of the business. If certain partners with technical or specialised skill and knowledge are required to assume primary responsibility for the management of the partnership, then it should be clearly stipulated in the partnership agreement.
  4. There is a presumption that partners are not entitled to any remuneration for acting in the partnership business, since they are entitled to profits. A partner who is desirous of getting paid for the services rendered to the partnership must ensure that the right to remuneration is provided for in the partnership agreement, else, the right to remuneration cannot be asserted.
  5. There is also a presumption that decisions on any ordinary matter of the firm may be taken by a majority vote of the partners. If any partner, such as the founding partners or a partner who contributed more capital than the other partners intends to have veto power, then that power must be provided for in the partnership agreement.[3]
  6. A partner cannot be expelled from the partnership by a majority of the partners unless that power is expressly provided for in the partnership agreement.[4]It is important that a partnership agreement provides for the power of expulsion and the grounds and manner in which such power may be exercised, if not, it may be difficult to remove a partner whose actions are prejudicial to the interest of the partnership.
  7. The death or bankruptcy of a partner terminates a partnership under both the Lagos State Partnership Law and the Partnership Act. This position can be altered by the agreement of the partners, providing otherwise.

Other matters that may be provided for in the partnership agreement include the use of the partnership name after the dissolution of the partnership; ownership, sharing and use of partnership property, including its intellectual property such as trademarks, copyright, trade secrets and patents owned by the  partnership.

Provision should also be made in the partnership agreement for its periodic review, inorder to meet the exigencies of modern commerce.  There are still other relevant issues that the law is silent on, which partners are expected to regulate by their agreement, such as the management of the partnership finances, authorised signatories etc. It is therefore prudent for every business to have in place, a detailed agreement that will clearly spell out the rules governing the business relationship among all the partners.

 

[1] Partnership Act, sections 5 and 8.

[2] Lagos State Partnership Law, section 23(i).

[3] Partnership Law of Lagos State, section 23(viii).

[4] Partnership Law of Lagos State, section 24.