Who can use this Partnership Agreement?
What is this Partnership Agreement for?
A partnership agreement is an essential document for any partnership. It sets out the rules for governance and management of the partnership business. The terms deal with partnership capital, profits and losses, drawings by partners, conduct of partnership business and decision-making.
What are the main issues?
There are many issues to be covered. The most important include:
Capital and profit shares. The partnership agreement will identify the share of capital and profits that each partner has in the business. Also, it will deal with losses – usually they are in the same proportions as profits.
Drawings/salary. As partners own the business, they do not get a salary. Instead, partners normally withdraw agreed amounts from the income of the business as “drawings” each month. At the end of the year the drawings will be deducted from the profit before profit is distributed. The partnership agreement will say what happens if there is not enough in the bank to pay the drawings or if a partner overdraws.
Management. The agreement will set out arrangements for meetings and voting rights of the partners. Sometimes there is a core group who manage the business while other partners have a more limited right when it comes to decision-making.
Partnership changes. The agreement will specify who gets to vote on introducing new partners. In a small partnership this usually means all the partners. Notice period for a partner wanting to retire will be covered as well expulsion, if a partner misbehaves. Death of a partner is also dealt with. Because capital and profits have to be paid to outgoing partners, there are often procedures for the payments to be staggered over a period. There will also be restrictions on competition for an outgoing partner.
Holidays, maternity/paternity leave, sickness and other issues will also be covered: as owners, partners do not have an automatic right to the same benefits as employees.
What detailed terms does the partnership agreement contain?
This fifteen page document contains 24 clauses covering
For more information on each of these sections, see our Explanatory Notes below which you will also receive when you download the document from our website.
For information on signing documents see our Contract Signing page
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N.B. Please note that this Agreement contains some clauses with alternative wording and some parts of the Agreement are in square brackets [ ]. It is important to ensure that the final Agreement to be signed by the partners contains only wording that is acceptable to the parties and that all alternative provisions and square brackets have been removed. Similarly, all blanks should be filled in before signature.
The date to be inserted on page 1 and at the top of the cover page is the date on which all the partners have signed the Agreement.
The full names and permanent address of each partner should be inserted on Page 1. The names of the partners shall also appear on the cover page. Note that when preparing an agreement for 4 as opposed to 5 partners the reference to a fifth party must be deleted.
One of the two introductory sentences should be deleted, depending on whether this is a new business or whether the partnership already exists but there is not yet any formal agreement
There are various details to be inserted here including the date to which the annual accounts are made up, and a brief description of the business
The interest rate to be inserted is the rate of interest payable on partnership capital by the partnership to the individual partners. Since partners frequently raise capital by borrowing from a bank, it is usual for the interest rate under a partnership agreement to be slightly more than the rate which each partner has to pay to his bank.
The name of the bank to be inserted in the definition of interest rate will usually be a bank with which the partnership has an account.
The definition of “Majority” provides for 2 options: either any 3 partners may constitute a majority or any partners whose individual capital contributions to the partnership exceed an agreed percentage of the total partnership capital. The Agreement provides that the following matters may be subject to a majority vote:
Clause 8.4: management of partnership other than items expressly requiring unanimity; Clause 12.4: amount of reserves; Clause 12.6: change of accountant and/or accounting year; Clause 8.8 (quorum required for partnership meetings) has alternative wording dependant upon the definition of “Majority”; Clause 13.5 requires a majority to agree on granting a partner compassionate leave.
2. ESTABLISHMENT OF PARTNERSHIP
This clause simply states the date on which the partnership comes into effect. If it already exists, then the effective date of the Agreement will be inserted as per the second alternative.
3. NAME PRINCIPAL OFFICE AND PROPERTY
In clause 3.1 the name of the business is to be inserted and in clause 3.2 the head office address should be inserted. Clause 3.3 makes it clear that the premises of the partnership (the “Property“) and office furniture and equipment is held by the partnership. Where the partnership’s premises or furniture/equipment are held in the name of one partner it is made clear that that partner holds that property in trust for the partnership.
In this clause the amount of capital which each partner has to contribute should be inserted. The percentage contribution of each partner is also shown, since this can be relevant if percentages are used in relation to voting rights (see the definition of “Majority” in clause 1). Note that the table will need to be amended to delete reference to “Partner E” when preparing an agreement for 4 as opposed to 5 partners.
Clause 4.2 makes it clear that any additional capital is to be contributed in the same proportions as the initial capital, and clause 4.3 underlines this.
Clause 4.4 deals with the entitlement of the partners to receive interest on their respective shares of capital.
5. PROFITS AND LOSSES
It is usual for profits and losses to be shared in the same proportions as the capital contributions but this is not always the case.
The percentage share of each partner should be inserted in clause 5.1. Note that the table will need to be amended to delete reference to “Partner E” when preparing an agreement for 4 as opposed to 5 partners.
Under clause 5.2, if there are any expenses which partners might incur but which are not to be treated as expenses of the partnership, then some adjustment to clause 5.2 might be required.
It is usual for partnerships to arrange that each partner can withdraw a regular monthly amount on account of his share of profits similar to a monthly salary. This clause deals with this matter, and makes it clear that if there is not enough money in the account, drawings cannot be taken. Similarly, any partner who withdraws more than his profit share for a year must immediately repay the surplus – with interest if the words in square brackets are retained.
Often, but not always, a partnership will retain part of its profits to meet the anticipated income tax liabilities of each partner and arrange for the partnership’s accountant to settle income tax liabilities with HM Revenue & Customs. Clause 6.4 provides that where the tax liability of an individual partner is less than anticipated the balance of any sum reserved is to be returned to that partner. Similarly where a tax rebate is received by a partner in respect of partnership profits he is obliged to repay that rebate to the partnership.
7. PARTNERSHIP LOANS
This clause contains a reference to the possibility of one or more partners making a loan to the partnership and in that case, interest at the agreed rate will be payable.
Clause 7.2 provides that a loan must be repaid on notice – six months is suggested in our clause.
In practice, if any partner does make a loan to the partnership, it would be sensible to have a separate loan agreement dealing with these issues in more detail.
8. CONDUCT OF PARTNERSHIP BUSINESS
This is one of the most important clauses from a practical point of view as it deals with the day-to-day management of the partnership, and how decisions are arrived at.
Clauses 8.1 and 8.2 deal with frequency of meetings and who may call a meeting
In clause 8.3 there is a list of matters which require the consent of all the partners. This list will vary depending on the nature of the business but it is usual for all major decisions, in particular the admission of a new partner, or any increase in capital, to require the consent of all.
Under the law, individual partners have joint and several liability, i.e. a debt incurred on behalf of the partnership by one partner can result in any of the partners becoming liable to the creditor for that debt. Unanimous agreement on all decisions of substance is therefore recommended.
Under clause 8.4 a majority vote is required for all decisions not covered by clause 8.3. See the reference to definition of Majority above.
If the partnership decides to delegate some decisions to an individual partner, it is advisable to require that partner to report to partnership meetings, so that all the partners know what is going on.
Clauses 8.5 to 8.8 deal with the procedures relating to meetings and decision making.
Under clause 8.9 there is potential provision for a partner to appoint another partner as his proxy, but this is not always acceptable, especially in small partnerships.
9. GOOD FAITH
This clause sets out some general obligations on the partners – to devote all their time to the business, promote the partnership, etc.
If any of the partners is only involved on a part-time basis, or if a partner has an interest in another business, then appropriate wording should be inserted to make it clear that the particular circumstances are acceptable to the partnership
10. RESTRICTION ON PARTNERS
Following on from the previous clause, clause 10 imposes a number of specific restrictions on partners: serious harm can be done to a business if one of the partners, without any consultation, makes commitments to third parties, and this clause is intended to avoid those risks. In addition, clause 10.2 requires any partner who fails to comply to indemnify the other partners so that they do not suffer loss.
11. PARTNERSHIP BANK
The name and address of the bank should be inserted in clause 11.1. The signing arrangements are dealt with in clause 11.2.
This clause provides not only for proper accounts to be maintained but also for a balance sheet and profit and loss account to be prepared each year. The firm’s external accountants will prepare the annual accounts which will be signed off by the partners. Adequate provision for reserves, etc, will normally be agreed on the recommendation of the accountants and this topic is covered by clauses 12.3.and 12.4.
Note that disagreements as to the reserves are to be settled by a Majority vote (clause 12.4) whilst replacement of the partnership’s accountants or changes to the partnership’s accounting year may either be decided by a Majority or by unanimity (clause 12.6), whichever option you select.
13. HOLIDAYS & LEAVE
Relevant details need to be inserted here. In addition to annual holidays, this clause covers the possibility of a partner taking maternity, paternity or adoption leave. While employees have a statutory right to such leave, the law does not apply to partners so we have provided for the partnership to establish its own policy – to cover both the period of the leave and the financial implications. We also have a clause here dealing with compassionate leave – e.g. when a parent or spouse of a partner dies.
It is important for every business to have adequate insurance in place. The list in clause 14.2 is indicative only and it needs to be tailored to the business. For example, professional indemnity insurance will normally only apply where the partnership is a firm of professional consultants who might become liable for a negligence claim. If the partnership business is manufacturing, product liability insurance may be appropriate.
Note too that the obligation to insure property of the partnership extends to property held in the name of one partner in trust for the partnership.
15. RETIREMENT EXPULSION AND DEATH
A fairly long notice period, usually at least six months, and sometimes as long as a year, is customary, when a partner wishes to leave. For accounting reasons, it is helpful for the date of a partner’s retirement to coincide with the date of the end of the accounting year.
A compulsory retirement age is covered under clause 15.2. Careful thought needs to be given to the selection of a compulsory retirement age as the partnership may face a claim for age discrimination. As a general rule we do not advise opting for a compulsory retirement age under clause 65.
A partner who becomes bankrupt, commits a material breach of the Agreement etc., can be required to leave the partnership if the other partners give him notice.
16. CONSEQUENCES OF RETIREMENT EXPULSION OR DEATH
This clause sets out the need for a set of accounts to be prepared when a partner leaves and the outgoing partner will be entitled to whatever is shown as being due to him in those accounts.
Advice from accountants on the wording of this clause is recommended. Under clause 16.3, while the same accounting principles will be applied to the termination accounts as to the annual accounts, some exceptions might be applicable – e.g. by excluding any valuation for goodwill.
17. FORMER PARTNER’S SHARE
Unless the continuing partners decide to wind up the business under clause 18, this clause sets out the period within which the outgoing partner must be paid his share of capital.
Under clause 17.3, the outgoing partner’s liability for tax from his share of profits and any liability which is due to some fault on his part are dealt with.
If one of the partners leaves, the others may decide to wind up the business rather than pay for the outgoing partner’s share and clause 18 covers this eventuality. Note that the Agreement expressly provides that no one partner may unilaterally dissolve the partnership.
19. RESTRICTION ON FORMER PARTNER
It is usual for someone who leaves a partnership to be restricted from taking business or soliciting customers of his former firm. Legal advice should be obtained as a restriction which is too widely drafted may well be unenforceable. By limiting the period of the restriction and confining it to a relevant geographical area can help to ensure its enforceability. It is important to remember that there is no “rule of thumb” as to what will constitute a reasonable and therefore enforceable restriction: this will depend (amongst other factors) on the type of business carried on by the partnership, its size and the local market for services/goods of a similar type provided by the partnership.
The formalities required for giving notice under the Agreement are dealt with here
21. DISPUTES AND GOVERNING LAW
This clause provides for a three-stage dispute resolution process – negotiation, mediation (but only if agreed) and, finally, arbitration.
An alternative to arbitration is to refer the dispute to the courts but in the case of a partnership, litigation between partners could attract publicity and damage the business – arbitration offers a confidential way of dealing with major disputes.
The Agreement is governed by English law.
See the Free Documents on our website for more details on Arbitration (Z139)and Alternative Dispute Resolution. (Z140).
22. ENTIRE AGREEMENT
This clause makes it clear that any previous agreements or other arrangements agreed between the partners are of no effect once the partnership agreement has been signed.
A “Boilerplate” clause which deals with the possibility of one of the terms becoming invalid for some reason. . For information on Boilerplate Clauses see our Free Document Z159.
Another “Boilerplate” provision, which makes it clear that if one of the partners is let off the hook even if he has committed some breach of the Agreement, that will not prevent the other partners from later taking whatever action is allowed under the Agreement .
Each partner should sign the Agreement in the presence of an independent witness. If every partner wants a signed copy, four/five copies of the Agreement in its final form should be prepared and all four/five copies signed by the four or five partners (as appropriate) and witnessed. Note that when preparing an agreement for 4 as opposed to 5 partners the reference to the fifth partner and witness must be deleted.
Note that it is usual in England & Wales for a partnership agreement to be signed as a Deed – in which case the e the signature clause should be worded to this effect – see the alternative wording in square brackets. A deed is a document that is legally binding even if there is no consideration. It used to require the seal of the signatory to be affixed but nowadays all it requires is an independent witness who should sign after the signatory and then add his/her address and occupation. The same individual can witness more than one signature.