A partnership is a kind of business where a formal agreement between two or more people is made. They agree to be co-owners, distribute responsibilities for running an organisation and share the income or losses that the business generates.
These features of partnerships are documented in a document which is known as partnership deed.
Partnership Deed: A Comprehensive Guide and Key Considerations While Drafting
This article will explore what a partnership deed entails, its importance, and the key points to consider when drafting one.
What Is a Partnership Deed?
A partnership deed is an internal business contract that outlines specific business practices for the partners of a business. This document helps establish rules for how the partners will manage business responsibilities, ownership and investments, profits and losses, and company management.
Partnership deeds go by different names depending on the industry in which they're formed. You might know partnership deed as:
- Partnership Agreement
- Articles of Partnership
- Business Partnership Agreement
- Creation of Partnership Agreement
- Formation of Partnership Agreement
- Partnership Contract
Partnership deeds help answer, "What happens if..." questions before they come up in practice to ensure the company runs smoothly.
Types of Partnerships that need Partnership Deeds
A Partnership Deed is essential for clearly outlining the terms and conditions of partnerships, avoiding disputes, and protecting each partner’s rights.
Here’s a concise breakdown of businesses that benefit from having partnership deeds:
1. General Partnership (GP)
A simple partnership where two or more individuals share management responsibilities and profits.
- Why a Partnership Deed is Necessary:
- Unlimited Liability: Partners are personally liable for business debts.
- Joint Management: Ensures clarity on decision-making and management roles.
- Profit/Loss Sharing: Defines how profits and losses are distributed.
- Suitable For: Small businesses, consulting firms, and professional services.
2. Limited Partnership (LP)
Includes at least one general partner with unlimited liability and one or more limited partners with limited liability.
- Why a Partnership Deed is Necessary:
- Role Definition: Distinguishes roles between general and limited partners.
- Liability Protection: Outlines limited partners' liability and contributions.
- Capital Contributions: Clarifies profit distribution and transfer procedures.
- Suitable For: Real estate investments, venture capital firms, and investment funds.
3. Limited Liability Partnership (LLP)
Partners have limited personal liability while participating in management.
- Why a Partnership Deed is Necessary:
- Liability Limitation: Protects each partner from liability incurred by others.
- Management Structure: Clearly defines decision-making processes and responsibilities.
- Business Continuity: Outlines provisions for succession or partner exits.
- Suitable For: Law firms, accounting practices, and professional services.
Other Businesses that Benefit from Partnership Deeds
- Joint Ventures: Clarify roles and expectations in temporary partnerships.
- Family Businesses: Prevent conflicts with clearly outlined rights and responsibilities.
- Startups: Especially useful for multiple founders or investors to establish ownership and responsibilities early.
A Partnership Deed ensures operational efficiency, financial transparency, and protection for partners across various business structures.
Benefits of a Partnership Deed
Partnership agreements offer many benefits to those business owners who create one. A few of the most substantial benefits include:
- It helps partners to define the terms of their relationship.
- It regulates all partners' business and liabilities, rights, and duties.
- It helps to avoid misunderstandings between the partners since all of the terms and conditions of the partnership are specified in the deed.
- In the case of a dispute amongst the partners, it will be settled as per the terms of the partnership deed.
- There will be no confusion between the partners regarding the profit and loss sharing ratio amongst them.
- It mentions the role of each partner.
- It contains the remuneration that is to be paid to partners, thereby avoiding any dispute or confusion.
- It ensures the smooth functioning of the firm as the terms and liabilities between partners are in written form.
Contents of a Partnership Deed
A well-drafted partnership deed covers key elements that ensure smooth business operations and minimize disputes. Below are the crucial aspects every partnership deed should include:
1. Name of the Firm
The firm name, decided by all partners, must adhere to the provisions of the relevant Partnership Act. It serves as the official business identity.
2. Details of the Partners
Include all partners' names, addresses, and contact information for transparency and documentation.
3. Nature of Business
Clearly state the type of business the firm undertakes, whether it involves providing services or manufacturing goods.
4. Firm’s Duration
Specify whether the partnership is for a fixed term, a particular project, or an indefinite period.
5. Place of Business
Include the primary business location and any other places where the firm conducts operations.
6. Capital Contribution
Outline the capital provided by each partner, including money, assets, or property.
7. Ownership Interest
State the percentage of the business that each partner owns, proportional to their capital contribution.
8. Profit and Loss Sharing
Define how profits and losses will be distributed among partners, ensuring clear agreement on revenue sharing.
9. Management and Voting
Detail how partners will manage the business, assign responsibilities, and make decisions, including the voting process.
10. Admission, Retirement, and Removal of Partners
Create specific guidelines for adding new partners, handling withdrawals, or removing partners.
11. Salary and Commission
If applicable, specify any salary or commission payable to partners based on their roles or contributions.
12. Partner Drawings and Loans
State the conditions under which partners can draw from the firm’s profits and whether loans are allowed.
13. Duties and Obligations
Clarify the rights, duties, and obligations of each partner to avoid future conflicts.
14. Accounts and Audit
Detail how the firm’s financial records will be prepared, maintained, and audited.
15. Dissolution
Include procedures for dissolving the partnership and how assets and profits will be distributed upon dissolution.
16. Death or Disability
Provide instructions for handling a partner’s share in the event of death, disability, or insolvency.
Note: The above contents/clauses are general and there may be some other clauses that can be added to the partnership deed.
When to Use a Partnership Agreement
While a partnership deed is not legally mandatory in Nigeria, it is strongly recommended for any partnership, regardless of its size or complexity.
A partnership deed provides a clear framework for the relationship between partners, outlining their rights, obligations, and responsibilities. It can help prevent misunderstandings, disputes, and financial losses.
Here are some specific situations where a partnership agreement is particularly important:
- Partners with Different Levels of Investment: If partners have contributed different amounts of capital or resources to the partnership, a partnership deed can help ensure that profits and losses are shared fairly.
- Partners with Different Roles and Responsibilities: If partners have different roles or responsibilities within the partnership, a partnership deed can clarify their respective duties and authorities.
- Complex Partnerships: For partnerships with multiple partners, complex business operations, or significant financial stakes, a partnership deed is essential to protect the interests of all parties involved.
- Anticipating Future Changes: If you anticipate changes in the partnership, such as the addition of new partners, a partnership deed can provide a framework for addressing these changes.
- Dispute Resolution: A well-drafted partnership deed can include provisions for resolving disputes amicably, avoiding costly litigation.
- Succession Planning: If you want to plan for the future of the partnership in case of a partner's retirement, disability, or death, a partnership deed can address these issues.
In general, it is advisable to have a partnership deed in place whenever two or more individuals or entities are forming a partnership. Even for small, informal partnerships, a written agreement can provide clarity and protection for all parties involved.
Consequences of Not Having a Partnership Deed
When you start your business, the division of labor and resources between partners might seem obvious, so you might not think it's worthwhile to create a partnership agreement. Unfortunately, your business might suffer negative consequences in the future without one.
1. Legal Uncertainty
Without a partnership deed, your business defaults to generic partnership laws. These may not align with your specific needs or intentions.
2. Financial Disputes
Profit sharing, capital contributions, and financial responsibilities can become major sources of conflict without clear, written agreements.
3. Decision-Making Problems
Lack of defined processes can lead to deadlocks or unilateral decisions that harm the business or partnership.
4. Personal Liability Risks
Partners may face unlimited personal liability for business debts without proper protection clauses.
5. Exit Complications
Partner departures can become messy and potentially force business dissolution without predetermined exit strategies.
6. Succession Issues
A partner's death or incapacity can cause serious disruption without a clear succession plan.
7. Intellectual Property Confusion
Ownership and usage rights of business-related intellectual property can become contentious.
8. Operational Inefficiency
Unclear roles and responsibilities can lead to task duplication or neglect of critical business areas.
9. Funding Challenges
Banks and investors often require a formal partnership agreement, making it harder to secure funding without one.
10. Conflict Resolution Difficulties
Without agreed-upon methods for resolving disagreements, disputes can escalate and harm the business.
How to Draft a Partnership Deed?
The partnership deed can be drafted by all the partners after coming to a mutual agreement regarding the clauses of the deed. It can also be drafted by a legal professional.
Below are the points to be kept in mind while drafting the partnership deed:
- The deed should contain the clauses mentioned above.
- It must be executed by at least two or more partners.
- It should be drafted by mutual agreement between the partners.
- Ambiguous clauses and sentences must be avoided. The clauses must clearly state the details/description.
- It should be signed by all the partners on all pages of the deed.
While not mandatory, a partnership deed is highly recommended for most partnerships, especially those involving multiple partners, significant financial stakes, or complex structures. A well-drafted partnership deed can provide clarity, protection, and a solid foundation for a successful partnership.