Partnership Agreements – What are the main financial considerations?

What are the main financial issues to be considered in a Partnership Agreement?


The main financial issues to be considered are:

Capital Investment:

The agreement should state how much financial input each partner is to have. Capital investment from each partner is how the business will finance itself and purchase the assets needed to run the business.

Income and share of profits:

You will need to consider how much, if any, each partner will take from the business as a salary. This will be before profits are distributed and can be used to reflect the different roles and work input of each partner. Also, you may wish to award partners' interest on their capital contributions. This can be paid before profits are distributed to reflect any differences in capital investment. Unless expressly agreed, the Partnership Act states that each partner will share profits equally. If you want to share profits in different ratios, for example, to reflect seniority, then this will have to be expressly stated. You will also need to address the issue of how any losses will be shared.

Withdrawals:

A potential source of disagreement between partners is the amount of money each is entitled to draw from the business. Some may wish to store a higher percentage of profits in the business to maintain a healthy balance, whilst other partners may want to withdraw their share of the profits immediately. It is important, therefore, to agree on a limit on drawings, for example, a set monthly amount.

Shares in asset value changes:

In the situation where a fixed asset of the firm, such as a warehouse, is sold at a profit, how is this profit to be shared? Under the Partnership Act 1890 this will be in equal proportions unless stated otherwise. It may be important, therefore, to expressly agree on what is to be done in this situation if this profit is not to be shared equally.

Ownership of business assets:

The business may acquire assets during its life, partners may allow the business to use assets that they own or a partner may use the value of one of their own assets to represent their capital investment in the business. It is, therefore, important to stipulate which are the partnership's assets and which belong to an individual partner. Disagreement over the ownership of assets may occur when dissolving the partnership.

If the partnership is likely to prove quite complicated or there are substantial amounts of money or assets involved, you should seek advice from a solicitor. The above information however will help you consider the most important issues.
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