Question

A business partnership is similar to a marriage because partners need to work together to have success. (Horngren)

Why is a partnership agreement important? Give six (6) examples of the type of information/clauses that it might contain, please do not repeat the same examples using different descriptions .

Answer 1

A partnership is a mutual agreement between two or more individuals to carry on a particular business and share the profits/losses derived from it. A partnership agreement (also known as partnership deed) is made between such individuals which specifies the roles and responsibilities of all the partners and the reward they can expect from the successful operations of the business. It can also specify the process to be followed in case any critical issue is faced by the firm. The type of information/clauses (six) that might be contained in the agreement are given as below:

1) Details of Partners: A partnership agreement should contain details of all the partners. Details such as name and address of each and every partner should be clearly mentioned in the agreement.

2) Details of Business: A partnership agreement should specify the nature of the business proposed to be carried on by the partners. Further, it should contain details such as the name of the business and the address from where it is planned to be operated.

3) Capital Contribution: The partners generally decide to bring/contribute capital at the start of the business. The capital contribution (of each partner) should be stated in the partnership agreement as it forms the very basis of defining the ownership held by each partner in the business. Profits/losses may also be shared in the capital contribution ratio (if the partners mutually agree to do so). The agreement can also specify the rate of interest (if any), the partners will receive on the amount of capital contributed by them.

4) Profit/Loss Sharing Ratio: The partnership agreement should clearly specify the ratio in which the profits/losses generated from the business will be shared between the partners. This ratio can either be decided mutually between the partners or can be linked to the capital contribution of the partners.

5) Admission/Retirement Procedure: The partnership agreement can specify the procedure for the admission of a new partner or retirement of an existing partner. For Instance, the partnership agreement can specify that the consent of all the partners is required before a new partner is allowed to be admitted in the firm. Similarly, a partner may be allowed (by the agreement) to retire by will.

6) Dispute Resolution: The partnership agreement should specify the procedure to be followed by the partners in case of any dispute between them. For Instance, the partnership agreement can provide for the appointment of a third party arbitrator to resolve any dispute between the partners.