A Partnership Agreement is a written document between two or more individuals who intend to establish and operate a business to generate profit. The Agreement safeguards the interests of all partners involved in the business by clearly outlining the nature of the business, the contributions made by each partner, and the rights and responsibilities of each partner, among other details.
Partnerships in Nigeria are primarily governed by the Partnership Act of 1890 and the Company and Allied Matters Act (CAMA) 2020, which outlines the formation, rights, and responsibilities of partnerships. This article gives an overview of the key aspects, legal frameworks, and considerations regarding partnership agreements in Nigeria.
What is a Partnership?
Section 1(1) of the Partnership Law of Lagos State 2015 defines partnership as an organization structure entered into by two or more people to form and carry on business to make a profit. Only legal persons, whether natural or artificial of full legal age and capacity, and without legal disability, can form a partnership.
The maximum number of persons required to operate a partnership agreement is twenty (20) as provided by Section 19 of the Companies and Allied Matters Act 2020, with exceptions to law firms and accounting firms.
A partnership is a distinct relationship with its own legal personality, separate from an organization or company. The primary distinction between a partnership and a company is that a partnership does not provide limited liability to its partners.
Consequently, each partner may be fully liable for debts incurred by the other partners during the partnership’s business, unless the partnership agreement explicitly states the percentage of each partner’s liability.
Types of Partnerships in Nigeria
In Nigeria, there are two types of partnerships: General Partnership and Limited Liability Partnership (LLP).
1. General Partnership
In a General Partnership, all partners share joint and several liabilities for the debts incurred by the business. This means that each partner can be held responsible for the full amount of any business debts, regardless of their individual contributions. Furthermore, this liability extends to both current and former partners, making all partners potentially liable for obligations incurred during the partnership’s existence.
2. Limited Liability Partnership (LLP)
In contrast, a Limited Liability Partnership offers its partners limited liability protection. This means that partners are not personally liable for the debts and obligations of the partnership business. Their financial exposure is generally limited to their contributions to the partnership. This structure protects individual partners from being held responsible for the actions or debts incurred by other partners, making it an attractive option for those seeking to minimize personal risk while participating in a business venture.
Partnerships are not mandated to be registered with the Corporate Affairs Commission (CAC). However, if they wish to operate as an LLP, it is advisable to be registered for legal clarity and to avoid future disputes.
Essential Elements of a Partnership Agreement
Every partnership may vary in terms of objectives and the specific agreements between the parties. However, certain key terms and clauses must be expressly outlined to draft and execute a valid partnership agreement. In Nigeria, the essential terms that should be included in a written partnership agreement are as follows:
- Partnership Name: The official name under which the partnership will operate.
- Names of Partners: The full names and detailed descriptions of all parties involved in the partnership must be included.
- Business Purpose: The nature of the business activities to be conducted.
- Place of Business: The principal place of the business where the partnership will be operated.
- Capital Contributions: Details of the contributions made by each partner, whether in cash, property, or services.
- Profit and Loss Sharing: How profits and losses will be distributed among partners.
- Management and Control: Guidelines for decision-making and management responsibilities.
- Ownership Interest of the Partners: This is the percentage of ownership held by each partner in the partnership.
- Duration of Partnership: Whether the partnership is for a fixed term or indefinite.
- Dissolution: Conditions under which the partnership may be dissolved and the process for doing so.
- Dispute Resolution: Mechanisms for resolving disputes among partners, including arbitration or mediation clauses.
Finally, the agreement must be signed by all partners to be legally binding. We advise that you involve a lawyer in preparing a partnership agreement. A lawyer will ensure that the partnership agreement is legally sound, well-structured, and aligned with the partners’ expectations.
Grounds Upon Which a Partnership Can Be Dissolved
The dissolution of a partnership agreement refers to the formal process of ending or terminating a partnership. This can occur for various reasons, and it is important for the partnership agreement to outline clear terms and conditions for dissolution to avoid conflicts. Below are ways a partnership can be determined:
- Mutual Agreement: The partners may mutually agree to dissolve the partnership if they feel it has served its purpose or for other personal or business reasons.
- Expiration of Term: If the partnership was formed for a fixed term or specific project, the agreement may automatically dissolve upon completion of that term or project.
- Bankruptcy or Insolvency: If one or more partners declare bankruptcy or the business becomes insolvent, dissolution may be necessary.
- Death or Withdrawal of a Partner: The death, retirement, or withdrawal of a partner could lead to dissolution unless otherwise specified in the partnership agreement.
- Court Order: According to section 34 of the Partnership Law of Lagos, a court may order the dissolution of a partnership if it finds that the business is no longer viable or that irreconcilable conflicts exist between the partners.
Conclusion
If you are looking to enter into a business partnership in Nigeria, then preparing a partnership agreement is advised. It will protect the interests of all parties involved and provide a structure for operations and dispute resolution.
A partnership agreement must be comprehensive, legally sound, and tailored to the specific business needs. Therefore, it is advisable to engage a lawyer to draft a partnership agreement to ensure compliance with Nigerian laws.
By Lawcare Nigeria Team
