Partnership is defined by the partnership act as “the relation which subsists between persons carrying on a business in common with a view of profit”. The participation in profits is not, however, of itself alone conclusive evidence of the existence of a partnership, since the relationship rests upon mutual intention.
As the essence of partnership is mutual agreement, it is describable for the partners to come to some understanding before entering into partnership as to the conditions upon which the business is to be carried on, and as to their respective rights and powers.
Even though a formal agreement is made, this does not preclude subsequent variation where changing circumstances demand it; such variation can always be effected with the consent of all the partners, which may be evidenced by an amending agreement, or inferred from a course of dealing.
Clauses relating to accounting matters in partnership agreement
The general provisions affecting questions of accounts that could be contained in all partnership agreements, apart from any special circumstances, are as follows:
- As to capital; whether each partner should contribute a fixed amount or otherwise.
- As to the division of profits and losses between the partners, including capital profits and losses.
- Whether the capitals are to be fixed, drawings and profits being adjusted on current accounts, or whether they are to be adjusted on the capital accounts.
- Whether interest on capital or on drawings, or both, is to be allowed or charged before arriving at the profits divisible in the agreed proportions, and if so, at what rate.
- Whether current accounts are to bear interest, and if so, at what rate.
- "Whether partners" drawings are to be limited in amount.
- Whether partners are to be allowed remuneration for their services before arriving at divisible profits, and if so, the amounts thereof.
- Those proper accounts shall be prepared at least once a year so that these shall be audited.
- Those accounts when duly signed shall be binding on the partners, but shall be capable of being reopened within a specific period on an error being discovered.
- The method by which the value of goodwill shall be determined in the event of the retirement or death of any of the partners.
- The method of determining the amount due to a decreased partner and the manner in which the liability to his personal representatives is to be settled, for example, by the lump sum payment within a specific period, by installments of certain proportions, and the rate interested to be allowed on outstanding balances.
- In the event of there being any partnership insurance policies, the method of treating the premiums thereon and the division of the policy money.