Yes I totally agree with you! The subject of partnership can be very tricky to wrap your head around. I assure you that you are not alone. If this is something you are currently considering for now or in the nearest future, please do not be alarmed, we have your back as always and would right now give you the basics of a partnership agreement. Are you ready? Let’s begin with the definition.
B. WHAT IS THIS THING CALLED PARTNERSHIP?
A partnership is simply a voluntary agreement between two or more individuals, for the purpose of carrying out a business. It is important to note that an individual cannot be forced into such agreements unless through his or her conduct, held out to be a partner or allow him or herself to be held out as one. This would be considered as a partnership formed based on conduct, which is one of the acceptable ways of formation. Other ways partnerships can be formed are orally or in writing between a minimum of 2 and a maximum of 20 individuals.
C. OKAY SO WHAT NEXT?
Now before you proceed with a partnership, it is advisable that the terms of the partnership are prepared and agreed on by each partner. Of course this excludes illegal terms. In this document containing the terms, the following issues are normally addressed:
- The nature of the business
- Where the business would be carried out and its branches (if any)
- The name of the partnership
- The nature of the partnership
- Issues such as the types of partners should be addressed here. For instance: an active partner partakes in all the activities of the partnership while a dormant one does not take part in the activities but shares in the profit.
- Additionally, a nominal partner is one who offers their name to the partnership, but has no financial interest in it, while a secret partner is active in the affairs of the company, but not known to the public as a partner.
- The capital contribution each partner is to make to the partnership
- How the profit is to be shared in addition to losses (For example; 50/50, 60/40 etc. and when is it to be shared i.e. quarterly, yearly etc.)
- How the partnership is to be managed
- How and who makes the major decisions
- Salary for each partner
- What happens on the retirement, incapacity or death of a partner?
- Addition of new partners
- Dissolution of partnership (Very important)
D. WHAT IF I DO NOT HAVE A PARTNERSHIP AGREEMENT BUT SHARE IN PROFITS WITH THE PERSON I’M IN BUSINESS WITH?
Not to worry, although it is advisable to have a proper agreement before commencing, if you are already in a partnership without a formal agreement, there are some instances in which an existence of a partnership may be inferred. For instance:
- Presentation of receipts showing profit sharing in the business may be concrete evidence of the existence of a partnership.
- However, if you co-own a property under a joint tenancy, for instance, it is unlikely that a partnership would be said to exist
- An agreement to share in the losses incurred by the business is also a convincing evidence of a partnership
E. DO I HAVE ANY LIABILITIES AS A PARTNER?
Yes you do. All partners are jointly liable for all the debt and obligations acquired during the partnership. Upon the death of one of the partners, his or her estate becomes personally liable for unsatisfied debts. A partner is also allowed to sue one of the partners or all of the partners together. Also, in the course of the partnership, if there is a breach of trust or any wrong done to a third party, the partners are jointly and individually liable i.e. one or more of the partners can be sued independently.
F. WHAT IF I WANT TO DISSOLVE MY PARTNERSHIP?
Notice that ‘very important’ is put in front of dissolution of partnership in section C above. It cannot be overemphasized because dissolution can be very messy so it in important that this is addressed properly when creating the terms of the agreement. Although on face value each partner has the right to withdraw from a partnership at anytime, this is not always the case especially if there is a prior agreement.
The following are ways in which a partnership may be dissolved:
- Upon an agreement of the partners
- Death or bankruptcy of one of the partners
- Any activity that makes the partnership illegal, dissolves it
- A court order, which is normally obtained on application by one of the partners on specific grounds such as insanity of one of the partners, conviction based on a criminal activity etc.
- Subject to a prior agreement of the parties, the partnership can be dissolved by a given notice or expiration of the term or purpose for which the partnership was created. If the length of the term is not specified, usually a notice of dissolution by any of the partners is sufficient.
- Also, subject to the same agreement by the parties involved, dissolution occurs when there is misplaced trust and confidence.
- Finally, dissolution can occur if the business ceases to be profitable and the losses are become too much for the partners to accommodate.
G. AFTER THE DISSOLUTION…
Usually, on dissolution, the authority of the partners to conduct any activity for and on behalf of the partnership is terminated. In addition to this, the proceeds from the liquidation of the assets are used to cover any debts and obligations incurred by the partnership. However if the proceeds are not sufficient to satisfy the debts and obligations, each partner becomes personally liable for the debts of the partnership.
H. NOW LETS SUMMARIZE…
See that was not too bad! Glad you made it to the end and I’m sure you have a simpler understanding on what a partnership entails. If there is any other issues not covered here, which you need help with, please do not hesitate to contact us and we would get back to you as quick as possible. With that being said, here are a few pointers to refresh your memory:
- A partnership can only exist based on mutual agreement of all parties
- There must be an intent to make profits
- All partners have unlimited liability
- Please remember that a partnership agreement containing issues such as profit sharing, capital contribution etc., is extremely important for the smooth running of the partnership
- A partnership can be dissolved either based on an agreement between the parties, death, bankruptcy, court order, expiration, notice and lack of profits.
- After dissolution, you as a partner cannot carry out any activity for or on behalf of the partnership
- Proceeds of liquidation are to be used to offset debts and obligations. In the case of insufficient proceeds, the partners become personally liable.