Partnership is the relationship which subsists between persons carrying on a business in common with a view to profit. It is most often formed by a written agreement between two or more individuals or companies. The partners invest their money in the business; and each partner benefits from any profits and shares part of any losses. See section 1(1) of the Partnership Law CAP. P1, Laws of Lagos State of Nigeria, 2015; see also per Rhodes-Vivour J.S.C in Alade v. Alic (Nig.) Ltd. (2010) 19 NWLR (Pt.126) 111 at pg. 143 para H.
The import of the above definition is that, for there to be a valid partnership known to law, there are three main ingredients that must coexist. The ingredients are as follows:
1. There must be a business
2. The business must be carried on in common by two or more persons
3. The business must be carried on with a view to making profit.
However, section 19 of the Companies and Allied Matters Act 2020 puts a limit to the number of people who could form a partnership to be minimum of 2 and maximum of 20 with the exception of partnership formed by accountants and legal practitioners which could exceed 20. The section is hereby reproduced seriatim:
“19 (1) – No company, association, or partnership consisting of more than 20 persons shall be formed for the purposes of carrying on any business for profit or gain by the company, association, or partnership or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of some other enactment in force in Nigeria”.
(2) – Nothing in this section shall apply to –
(b) – any partnership for the purpose of carrying on practice –
As legal practitioners, by persons each of whom is a legal practitioner; or
As accountants by persons each of whom is entitled by law to practice as an accountant”.
See and Akinlose vs.A.I.T. Co. Ltd (1961) WNLR 213
Partnership could be formed by family members, friends or total strangers- once the factors mentioned above are present.
Although a Partnership can be formed orally, in writing or even by conduct, it is advisable to have a Partnership Deed in order to protect the interest of all the partners in the business; and to protect all the partners from unnecessary debt incurred by a partner on behalf of the business. This is because each individual partner is liable for all of the debts of the partnership whether they agreed to that debts or not, and whether they knew about that debt or not.
It is therefore our advice that, right from the inception of the partnership, the partners should put the scope and extent of their rights and the duties attached thereto into writing in form of partnership deed, in order to safeguard against any ultra –vire activities.
Many business partners are scared of telling their partners to sign a written partnership agreement especially when they are from the same family, religious organization or social group etc, because the other partners may accuse them of not trusting them. They are afraid that they will offend their partners if they insist that a written agreement be signed.
The issue of trust notwithstanding, it is better for all the partners to protect themselves against the action of other partners by engaging a lawyer who will write a partnership agreement for them.
If you decide to organize your business as a partnership, be sure you draft a partnership agreement that details how business decisions are made, how disputes are resolved and how to handle a buyout. You’ll be glad you have this agreement if for some reason you run into difficulties with one of the partners or if someone wants out of the arrangement.
The agreement should address the purpose of the business and the authority and responsibility of each partner. It’s a good idea to consult an attorney experienced with small businesses for help in drafting the agreement.
Factors to consider while writing a partnership agreement to protect the partners
1. The firm name. Any transaction entered into or liability incurred by a partner in the name other than the name under which the partnership operates will not be binding on the partners. It is not compulsory for the name to be registered except in certain circumstance as provided by Section 573(1)(a) and 574(1) of CAMA i.e if the firm name consists of words or letters other than the true surnames of the partners or their true surname with their first names or initials, same must be registered with the Corporate Affairs Commission within 28 days from the commencement of the business. Unregistered business is a well-recognized business organization in Nigeria, however, it is difficult to operate without registration as a business name because it will be difficult to open account in the partnership business name.
2. The nature of the business. The nature of the business which the partnership can engage in should be clearly stated to protect the partners because a partner is deemed to be an agent of the firm and that of his partners only when he acts for the purpose of the partnership business. The business for which the partnership is established must be legal.
3. The commencement and duration of the partnership. Anything done after the partnership is terminated will not be binding on the partners.
4. The capital contributions of each partner must be clearly agreed and stated and the profit sharing formula of profits and bearing of losses must be clearly stated. Unless this is clearly stated, the profits will be shared equally regardless of the ratio of contribution and the losses will also be borne equally.
5. Allowances and remuneration of the partners and mode of payment should be stated: Monthly, quarterly, annually etc.
6. Accounts and banking. There should be provision for keeping of proper books of
account, and the auditing of the accounts so as to prevent future occurrence of conflict among the partners.
7. Expenses to be borne by the partnership and the limitation of debt a partner can incur on behalf of the partnership without prior notice and consent of the other partners must be stated.
8. Conduct and powers of the partners. There should be a sufficient detail in relation to good faith, hiring and dismissal of staff, any restrictions as to the powers of a single partner, the time and attention to be given to the work of the partnership, the taking of decisions and general management of the business.
9. Retirement and death of partners and entitlement to any benefits should be stated.
10. Admission, withdrawal and expulsion of partners.
11. Dissolution or winding up of the partnership.
12. Dispute resolution clause as to whether the matter of dispute should first be referred to arbitration before any partner could approach court
In conclusion, it is business wise and expedient for anybody that is going into partnership, whether with his family members, friends, church or mosque members etc to have a written partnership agreement ab initio.
Saheed Akininola esq is a legal practitioner and writer. His expertise covers a wide areas such as: corporate practice, asset acquisition, property acquisition, real estate, debt recovery, family law etc. He consults for individuals and corporate organization across Nigeria and abroad. He could be contacted via: [email protected] +2348032493960