Which clauses should be included in a partnership agreement?

Which clauses should be included in a partnership agreement?

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A partnership agreement should deal with the following issues: Formation, profit sharing arrangements, salaries, banking arrangements, changes of partners, liquidation and responsibilities of partners.

While there is nothing stopping you from preparing your own partnership agreement, we recommend you have a legal expert table the contract.

Important Points to Consider

The obvious information

  • Name of the partnership
  • Purpose of the partnership
  • Duration of the partnership

Responsibilities, performance and remuneration

  • Explain in detail each partner’s role.
  • What will be the income of each partner?
  • Detail how profits or losses will be distributed
  • Define each partner’s responsibilities and describe the level of performance that is required from them.
  • State clearly if partners are expected to make a full-time commitment to the venture, or whether other business activities will also be allowed.

Investment in the business

  • If a partner loans money to the business, how will the partner be repaid?
  • What will each partner be contributing in terms of cash, assets, loans, investments and labour?

Withdrawal and admission of partners

  • Provide guidelines that must be followed if one partner wants to leave the partnership.
  • List grounds for a partner to be expelled from the partnership.
  • Explain how new partners be admitted to the partnership.
  • Can a partner sell their interests in the business to an outsider?

Financial

  • Which partners will have check signing privileges?
  • Who will be authorised to draw on the partnership’s accounts?
  • How will the books be kept?

Valuation

  • What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?

Buy-out clause

  • What guidelines should be followed if one partner wants to retire, dies or leaves the partnership?
  • Decide if partners who leave have to sign a non-compete agreement.

What is a non-compete clause?

The use of such clauses is premised on the possibility that if a partner is expelled or leaves to start another business, he or she could potentially gain competitive advantage by abusing  private information, trade secrets or customer/client lists, business practices, upcoming products, and copying marketing plans. The non-compete clause prevents this from happening.

What methods will be used to settle disputes?

Decide at the outset and include in the partnership agreement what methods must be disputes can’t be resolved. Methods include negotiation, mediation and arbitration.

  • Negotiation – Negotiate directly with the other person. You may hire an attorney to negotiate directly with the other side on your behalf. There are no specific procedures to follow.
  • Mediation – A voluntary process in which an impartial person (the mediator) helps with communication and promotes reconciliation between the parties that will allow them to reach a mutually acceptable agreement.
  • Arbitration – Typically an out-of-court method for resolving a dispute. The arbitrator controls the process, will listen to both sides and make a decision. Like a trial, only one side will prevail. Unlike a trial, appeal rights are limited.
  • Legal route and court – only as a last resort if all other methods fail.

Register with SARS

All partners are required to include their full income from the partnership in their personal tax returns (IT 12) available from the Receiver of Revenue (this only carries the cost of postage – some banks offer assistance with the completion of this form free of charge as a customer service).

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