Do you have a Partnership Agreement?

It is not necessary to have a formal partnership agreement for your business structure to be recognised as a partnership. In general, if there is no written agreement, partners are deemed to hold equal shares and thus have equal responsibility for the operation of the business, as well as its profits and debts.

The provisions of the Partnership Act apply only if there is no provision to deal with that particular matter in a separate partnership agreement. The partnership agreement will always override the rules set down in the Act. It is advisable, therefore, to enter into a partnership agreement so that things are clear for everyone involved.

Even though the law does not require it, it is a good idea to have a partnership agreement set out formally in writing. There is something about having it written down in black and white. It means that everyone involved knows his/her obligations and responsibilities and there is less room or argument later on.

The running of a partnership depends on mutual trust and confidence between the partners and the law reflects this expectation.

The problem arises when the relationship between the various partners breaks down. This is when you need to have a well-drafted partnership agreement that covers these relationship breakdowns and the actions that need to be taken during this time.

The partners also need to know what happens if a partner dies, retires or there is a change in circumstances.

Here is a checklist of just a few of the points that should be covered in a partnership agreement:

  • Name of the partnership.
  • Term of the partnership – that is, how long is it to last for?
  • Location of the partnership business.
  • Capital contributed by each partner.
  • The basis whereby a partner can be expelled.
  • What each partner will get in the way of profits and losses.
  • Salaries, etc paid to each partner.
  • The amount each partner can take by way of regular drawings against their profit share.
  • The duties, responsibilities and area of control that each partner has.
  • The term that prohibits outside business activities of partners without the other partners knowing.
  • Whether the surviving partners will have the right to continue using the same name of the firm.
  • Whether all partners or just some will have access to the books of account.

These are just some points needing to be incorporated into a good partnership agreement.

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