Chapter 2 Partnership

A partner may also wish to lend rather than contribute specific property to a partnership. A written agreement clearly identifying which property is contributed and which is loaned is criti­cal to protect the partner’s interest in the loaned property.

Where real estate is to be contributed as partnership property or the agreement includes a term of more than one year,a written agreement may be necessary to comply with the statute of frauds.

A written partnership agreement is also advantageous to the attorney; not only may it justify a somewhat higher fee but also it places suggestions and advice in concrete form so that there is less possibility of misunderstanding. In fact, the advantages of a written agreement are so sub­stantial that lawyers who do not at least advice their clients to consider a written agreement be­fore entering into a partnership risk a malpractice suit should things turn bad between the part­ners later on.

2. Sharing of Profits and Losses

Profits of a business may be divided by agreement in numerous possible ways;

1. The partners may share on a flat percentage basis without regard to any other factor. Profit sharing rations for each partner may be established in the partnership agreement itself. They may also be established by issuing" partnership units "to each partner and determining the profit - or loss - sharing ratio for each partner by dividing the number of music owned by that partner by the total number of units outstanding. In this way, if new partners are added, dilution of existing interests occurs automatically without any need to amend the agreement;if old part­ners depart without new ones being added, the remaining interests are also automatically con­centrated. Partnership units also permit the creation of incentive options or unit appreciation rights that permit successful partners to increase their percentage interest firm.
2. Partners       may be entitled to a fixed weekly or monthly" salary. "This payment may be treated as a" cost" and subtracted before the" profit" is computed for division on some other ba­sis , or it may be considered an advance to be credited against the amount the partner is other­wise entitled to after division of the profit. In the latter case,the agreement should consider the actual profit allocable to him or her during any period.
3. The partners may share on a percentage basis, with the percentages recomputed each year on the basis of the average amount invested in the business during the year by each part­ner. This type of agreement is appropriate where the business is largely dependent on capital for generation of income.
4. In large partnerships, each partner may be entitled to a fixed percentage applied a- gainst perhaps 80 percent of the income. The remaining 20 percent is allocated among the junior partners as a form of incentive compensation by a committee of senior partners on the basis of productivity,billings,or some other factors. Usually committee members are not themselves eli­gible to share in the" incentive pie. "
5. The agreement may be intentionally silent on the division of profits, so that each year the partners can work out the division of profits by agreement on a mutually - acceptable basis. In larger firms, a committee or a single managing partner may have the responsibility of making the division of profits.