Instructions for the Partnership Exercise: Your assignment is to correct a defective three person partnership agreement. You need to name at least three partners in your partnership agreement. If you are working with other students, use their names. If you are working on your own, or with only one other student, invent the names of the other partners. I highly recommend that you do not have more than three partners, as it becomes increasingly difficult to draw up an agreement that works with more people. Read these instructions carefully. Part of your mark is determined by how well you follow the instructions. If there is anything that you are not absolutely sure of, ask your instructor. In the appendix, you are given a precedent to work from. Use this as a basis for your agreement, but remember that this is based on two partners. It will not always work for three partners. The point of this exercise is for you to think things through. Partnership agreements are important for dealing with what may happen in the future. It's easy to deal with what you think will happen; it becomes very tricky to deal with what may happen especially if you don't think it will. In a partnership agreement, it is important to deal with what you don't think will happen, in case it does. Your ability to anticipate problems will positively affect your mark. It's when things don't happen as expected that you really need a well drafted agreement. A good partnership agreement deals with issues that could arise, and provides either an answer or a way of determining an answer for every issue that the partners may have a dispute about. Make sure that you have read all of the material, including your text, this material, and the material in the appendix on this assignment. Make sure that you understand it well, and are comfortable with all of the information prior to commencing writing of the agreement. Review the questions that you need to answer prior to commencing writing the agreement. The precedent in your appendix contains some technical words. You might not understand all of them. You can't properly use the precedent if you don't understand what it says. Ask your je instructor for explanations of any terms that you don't understand. Also, the precedent is not error free. It is meant as a guide and to give you some idea of the types of issues that you need to deal with. You need to think things through carefully in order to draft your own agreement. The agreement must be fair to all parties, or reasonable people will not agree to it. a The way most people approach a partnership agreement is by looking at what they expect will happen. However, at the time the agreement is made, the partners are usually getting along. One does not need an agreement when everyone is getting along! One way to approach the drafting of the agreement is to think fight'. Go through the agreement and think of the future and what the partners could possibly fight about. What terms will become a problem if the partners are not getting along? For these situations, you need to have an answer, or a way of determining an answer contained in an agreement. An example of an answer' for an issue relating to hiring staff would be If the partnership decides to hire someone to do books, they will hire David Jones. In the future, it will be difficult for the partners to fight over who they will hire, as there is an answer in the partnership. The answer is that they will hire David Jones. An example of a 'way to determine an answer' would be "If the partnership decides to hire someone to do books, this issue will be determined by a majority vote of the partners'. Here, the answer (who will be hired) isn't determined, but there is a way to determine the answer that is certain. Having an answer' is usually better than having a way to determine an answer'. What you should not have in your partnership agreement is an agreement to agree'. This is where the agreement says something like We will agree later on that issue. You will note that the precedent in the appendix has these at number 9 (banking arrangements). If you can agree where to bank (for example), why not put this in the agreement when it is being made? If you can't agree where to bank at the time of the agreement, then how will you be able to agree later? An agreement is like the rules in sports; you don't want to find out that you have a different view of the rules after the game is half-played. You need as much certainty as you can get, right from the start. If there is a dispute about what the partners have to do, the dispute normally has to go to court to sort out. This can be very expensive. A good agreement keeps the parties out of court. They don't have to go to court to get answers, as the agreement provides either the answer or a way to determine the answer for all reasonably likely future disputes. Also, remember that this is a contract that binds the parties to obligations. If the agreement says you must do something, then you have to do it or be sued, even if you can't do it. Don't set things up so partners will be obliged to do things in the future that they may not be able to! The assignment is described below. Your partnership wants to create a business. You have decided you need a partnership agreement to do so. You need $100,000 of capital to start the business. You must decide how you will split up the capital contributions, but no two partners may contribute the same amount to the partnership Prepare a partnership agreement that meets the needs of your partnership. The preamble in the document you prepare should make it clear what type of business you wish to run and your capital contributions. . . When preparing your agreement, consider issues such as: division of profits and losses (cannot be equal for the purpose of this exercise liability for debts/wrongs duration of agreement sale or termination of business draws ($ on a regular basis) capital contributions sale of partnership interest work/income outside of business sale or termination of business . banking death of a partner insanity of a partner bankruptcy of a partner expulsion of a partner management of the business dispute resolution amendment of agreement situations where there is way more profit than you predict will occur situations where there is way more loss than you predict will occur Errors in this assignment include: Agreeing to agree at a later date Not being clear, so that breach/compliance cannot be clearly determined Having a back door where a person not approved can take over a partnership Having a decision that needs to be made without having a "who decides. Having majority being able to impose their will about partnership rights and obligations on a single partner. Having no clear answer or way to get an answer on issues that could occur in the future. Not dealing with all possible issues (dealing with two out of three possibilities) Profit and loss not using the same formula Trying to bind outside 3rd parties to the partnership contract. . . a Other Factors that require consideration 1. This is a contract, not a list of expectations. It must only deal with rights and obligations, like any other contract. 2. Don't set up breach. No prudent person would agree to be bound to something that they did not know that they could perform in the future. 3. You often cannot delineate areas. If you are creating a list, and see that the list can never be made complete', use extreme caution. 4. The partnership is not a party to the contract and cannot be bound to it. The partnership can also not buy itself. 5. Having a criteria (trigger) for rights and obligations often requires determination of who decides'. Having to go to court = bad agreement. Court is too expensive. 6. Name precise people, not categories of people, when referring to a third party. Agree on the person in advance. 7. Effort must be fairly compensated 8. Profit formula must = loss formula 9. Having someone stay as a partner when they wish to leave is exceedingly dangerous. Don't have forced partners. 10. Valuation is often important, as people tend to fight about money in business. 11. How can additional capital be added without setting up breach 12. On death, a person's estate is responsible to receive what they are entitled to AND pay their outstanding obligations. Rights and obligations do not terminate on death. 13. Do not agree to agree later. Your agreement must work now, and in the future, for all reasonably foreseeable events. 14. Bankruptcy can be a backdoor for allowing the trustee to step into the partners place. Do you want this? 15. Understand which decisions are made by majority, and which have to be unanimous, and don't confuse these two situations. 16. Do not have perpetual investment in business, or you will have no way of removing that profit. Assignment: You are to MODIFY the three person partnership found on the shared directory where necessary. Use the guidelines above, the resources provided to determine is an existing clause needs to be modified. The resources for this assignment are: 1. The instructions, set out above in these notes. 2. The two person partnership agreement, found at the end of these notes. 3. The three person agreement that you are to amend, found on the shared directory in my CTL folder Leave the existing three person partnership intact, but below each clause that is there you should state: Either: A: This clause is fine as it is, or, B: This clause is not good as "X" is wrong with it and here is how it has to be modified to fix it: AFTER you have completed the agreement you have to answer the eight assignment questions, based on your amended agreement If you cannot answer the questions, the agreement has a hole in it and needs to be fixed. The questions are meant to have you think of what similar TYPES of issues need to be addressed. Do not deal with answering the specific question in the agreement; think about what that question is really about, and deal with all issues of that type in the agreement Answer the following questions (as a group if working with a group) and submit them with the partnership agreement. Submit only one agreement and one set of questions if working with a group Answer the following questions (as a group if working with a group). Identify the law (the legal rule from a court decision, the section of the Act, or the paragraph of your agreement) that applies to each question. Then apply the law (either partnership agreement or partnership act) to the facts you have created with your partnership agreement to reach a conclusion. For each question, you should provide the answer to the question based on the , and where that answer is found in your agreement. 1. Who signs cheques? 2. What happens if one partner wants to leave the partnership, but the others want to continue on in business? 3. What happens if one of the partners is asked to teach a course at the local college in the evenings, and wants to do so? 4. If the third partner becomes insolvent (and has no money left in capital account), the partnership is dissolved, all assets have been sold, and the partnership still owes $20,000 to creditors, how will the debt be split among the partners? Specifically indicate how much each will have to pay. 5. What can you do if the second partner is caught embezzling money from the partnership? 6. What happens if you need to make significant alternations to your business, and need an additional $55,000 capital to do it? How much will each partner contribute? 7. What if the first partner wants out of the partnership, and wishes to sell his/her interest to the third partner alone? 8. What does the first partner have to do to ensure that he/she is no longer liable for the firm debts after leaving the partnership (as in question 7)