When two or more individuals come together to form a Partnership, it is advisable to have a correctly drafted Partnership Agreement carefully detailing the terms of the business relationship. A partnership agreement is a contract between partners in a partnership which sets out the terms and conditions of the relationship between the partners.
Required:
Identify and explain FIVE key issues that should be covered in a partnership agreement when setting up a partnership. (10 marks)
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- Capital: The partnership agreement should state how much each partner is putting into and leaving in the partnership.
- Profit-sharing Ratio: The partnership agreement should include how any profits are to be split between the various partners.
- Interest on Capital and Drawings: The agreement should disclose the interest rate that partners are entitled to, based on the amount of capital invested in the partnership, or the interest to be paid to the partnership based on drawings from the partnership. If no interest on capital or drawings is being paid/received, this should be included in the partnership agreement.
- Partners Salaries: The agreement should state what, if any, and when salaries are to be paid to partners.
- Drawings: The partnership agreement should include details of the amount of drawings allowed by the partnership to partners.
- Goodwill: The partnership agreement should state whether the business will be valued and goodwill allowed to be brought into the partnership accounts or not.
- Admittance/Amalgamation/Dissolution of Partnership: The partnership agreement should include details on these three aspects of the partnership. (Any 5)