A partnership can be formed orally or in writing by executing a partnership agreement to stipulate the relationship between the parties to the agreement. A partnership agreement is a legal contract that contains the terms and conditions that governs the way the partnership will be operated between parties involved in starting a partnership structured business for the avoidance of any conflict between the partners. The law can presume there is an existence of a partnership once the essential elements of a partnership are present in the partnership agreement.
Partnerships in Nigeria are regulated by the Companies and Allied Matters Act 2020 (as amended) and the Partnership Law of each State of the Federation. Section 1(1) of the Partnership Law of Lagos State Cap P1 2015 defines partnership as an organization structure entered into by two or more people to form and carry on business to make a profit. The maximum number of persons required to operate a partnership agreement is twenty (20) as provided by Section 19 of the Companies and Allied Matters Act 2020, with exceptions to law firms and accounting firms.
Content of a Partnership Agreement
Every partnership formed may differ in terms of the objectives and the agreement suitable to the parties, however, for drafting and executing a valid partnership agreement, certain terms and clauses should be expressly detailed in the agreement. The important clauses to be contained in a partnership agreement in Nigeria include the followings:
- Name of the partnership (i.e. the name contained in the certificate of registration issued by the Corporate Affairs Commission).
- The full names and descriptions of all parties involved in the partnership.
- The general and specific nature of partnership business to be operated.
- Place of business of the partnership and branches, if any.
- Time of commencement of the partnership.
- Capital & Capital contribution: there is a presumption of equality in the absence of a contrary intention. All the partners are entitled to share equally in the capital of the business and must contribute equally to the capital of the business. This is the position implied by law in the absence of an express provision to the contrary. Therefore, if the partners intend otherwise, then instructions should be taken to include a clause in the agreement which will provide the proportions or percentages of partners' share in the capital and their contributions thereto.
- Sharing of profits and losses: the formula for this must be expressly stated or the law will imply equal division. By Section 23(i) of the Partnership Law Lagos, all partners are entitled to share equally in the capital and profits of the business and must contribute equally toward the losses sustained. Therefore, if the parties intend to share the profits and losses unequally, a clause should be inserted to reflect the sharing formula according to the intention of the partners.
- Partnership property: when a partner brings in any personal property, it should be expressly specified in the partnership agreement because the law presumes that every property used by the firm is bought with the partnership money and belongs to the partnership unless a contrary intention appears as provided in Section 20 of the Partnership Law Lagos State.
- Remuneration of partners: by Section 23(vi) of the Partnership Law Lagos, the law presumes that partners are not entitled to any form of remuneration for acting in a partnership business. Therefore, if the partners intend that remuneration should be paid, specific instructions must be taken to include an express clause to that effect.
- Suspension and expulsion of partners: when a partnership agreement does not expressly confer the powers for expulsion and suspension of any partner for gross misconduct, no partner can be expelled or suspended irrespective of his conduct. If any partner is expelled or suspended, it determines the partnership.
- Admission of new parties: if the partners intend to introduce and admit new partners with the consent of all existing partners without dissolving the partnership, a clause to that effect must be expressly provided for.
- Duration: usually the duration of a partnership is temporary, unlike an incorporated company that enjoys perpetual succession. A partnership can only live as long as the partners. Thus, there is a need to specify the duration of the partnership, failure of which it terminates at will.
- Sustenance of duration of partnership through the admission of new members.
- Dispute resolution: there should be a clause that provides for means of resolution of disputes between the partners either by resorting to an alternative dispute resolution (ADR) or litigation.
- Retirement: the retirement of a partner determines the partnership at any time on giving notice of the intention to do so. To avoid this, express provisions to the contrary must be provided for in the partnership agreement.
- The execution clause. All parties must sign the partnership agreement together with their respective witnesses.
Implied Terms in Partnerships
Some of the implied terms in a partnership relationship where the partnership agreement is silent are:
- Equal capital contribution.
- Equal sharing of profits and losses.
- The effect of death, bankruptcy, suspension, expulsion, or retirement of a partner is that it determines the partnership.
- Partners are not entitled to remuneration.
In the absence of specific provisions to the contrary of the above in the partnership agreement, they would be implied into the agreement by common law. To modify or exclude their implications, it must be expressly provided for in the partnership agreement.
Dissolution of a partnership agreement
A partnership may be determined via any of the following ways;
- A partnership agreement can be dissolved either by the effluxion of the fixed term or the conclusion of the specific undertaking or venture.
- Where there is no express term of the agreement, the partnership agreement can be dissolved by any partner giving appropriate notice to others of his intention to dissolve the partnership.
- A partnership can be dissolved because of bankruptcy or the death of one of the partners.
- A partnership can be dissolved on an application by a partner to the court by summons, the court may decree a dissolution of the partnership in the following cases;
- where a partner becomes permanently incapable of performing his or her part of the partnership agreement;
- where a partner is adjudged to be a lunatic;
- when the partner wilfully commits a breach of the partnership agreement and
- When in the opinion of the court, it is just and equitable to dissolve the partnership as provided under Section 34 of the Partnership Law of Lagos State.
Only legal persons, whether natural or artificial, of full legal age and capacity, without any form of legal disability can join in the formation of a partnership, this is because the partnership agreement covers the rights and responsibilities of each partner and all written partnership agreements are binding on the parties to it and in a case where a dispute arises from the relationship, the action will be enforced under the provisions of the executed agreement.
Finally, to reduce the potentiality of any form of conflict or complications between parties who intend to form a business structure and share proportionally in the business's capital, profit, and losses, it is essential to create a partnership agreement binding parties for that purpose.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.