Current and Future Financing Requirements
A partnership agreement can set-out how the partnership is going to be financed. How much capital are the partners obliged to contribute to the partnership? When and how will these contributions be made? Is all of the money required when the partnership agreement is signed or can it be paid in stages?
Unless the partnership agreement says otherwise, partners are not entitled to interest on capital invested. Some partners, especially those contributing more than their fair share to the partnership, may require interest on at least part of their capital.
Drawings by Partners
Drawings are advances to partners throughout the year against the anticipated profits of the partnership.
A partnership agreement should set out rules for drawing such advances and their accounting treatment. How are the anticipated profits to be calculated? What percentage profits can be drawn? What if the estimate is incorrect?
Profits and losses
The default position is that all partners are entitled to an equal share of the partnership profits and must bear the partnership losses equally. This applies to both capital and income profits.
Partners frequently want to vary these default provisions.
Individual partners may want a larger or smaller share of profits, or different treatments for capital or income profits. The partners may also want losses to be treated differently from profits.
Rules regarding the calculation of profits and losses will typically be included in a partnership agreement. These may deal with expenses claimed by partners, fees for other appointments outside the partnership, prior drawings, etc.
A partnership agreement can control the use of the partnership bank accounts, including rules regarding:
- the opening and closing of bank accounts;
- changing the bank that the partnership uses;
- who has authority to write cheques and setting appropriate maximums.
Partnerships (except where all of the partners are companies) are not obliged to submit accounts to Companies House and HM Revenue & Customs. However, the partners are entitled to view the accounting books and records of the partnership. In line with good business practice the partnership agreement should expressly provide for an annual profit and loss account and balance sheet to be drawn up.