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How do you arrange Partnership Agreements?

I've obtained a client who has no Partnership agreement in place. As a tax avoidance measure, with some good commercial reasoning to boot, it has been proposed to admit several long-term employees into Partnership.

The current Partnership has no agreement. The intention is to have a two tiered system whereby the current Partners are "Senior" and entitled to a higher profit share than the new "Standard" Partners. It is also intended to have allotted "Salary" rates for each Partner based on hours work with residual profits in a profit share arrangement.

The Senior Partners have power to vote (jointly) to remove any Standard Partner.

My first suggestion was to use a law firm so as to absolve us of responsibility.

I guess I have two questions:

  • Does anyone else generate Partnership agreements in-house without a qualified Solicitor?
  • What would be your expectation of costs to implement the above agreement using a Solicitor?

I have no issue drafting it personally. However my only concerns are whether I can provide "due care and attention" without the legal basis and what our insurers may think!

Cheers,

Chris

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On your own head

I assume this is the same client we discussed regarding VAT?

You need to be really careful here. While this structure might satisfy the VAT avoidance objective, you are just setting up future difficulties.

Have the implications for the current employees been fully discussed?

To cover the proposed structure and provide some degree of protection, the Partnership Agreement will have to be a particulary lenghy & detailed document.

If you must go down this road I would highly recommend getting a solicitor to do it but bear in mind that if it does not accurately reflect the intentions of those involved then it's not worth the paper it's printed on. 

 

  

 

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Busted in the first post! You're too good. Thanks again for the input, Roland.

Unfortunately I'm working in the micro sector here and the clients are extremely price sensitive. Where would we stand on providing a template with a caveat of the requirement for seeking suitable legal advice? Having the client sign and return a statement to the effect we cannot provide assurance over its legal status?

The joys of small practice eh.

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Woah!

Do you have PI cover for legal advice?

By all means review an agreement drawn up by somebody else as far as the financial provisions are concerned but don't assume any responsibility for its legal soundness.

When I was in practice, my partner and I drew up our own partnership agreement. After his untimely death, the lawyers shredded the intentions behind our agreement. I've been extremely wary ever since.

Your clients are entitled to exactly as much legal advice as they are prepared to pay for.

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Money well spent

If it was the case of a bog standard partnership agreement (if there is such a thing) then I would think you could get away with providing a template and a caveat that this is no substitute for legal advice etc that will probably keep you in the Good Lads Club with your institute.

In this case however, the complications from the structure and the fact that I would forsee it highly likely that this document will be used (possibly in court) to try to settle a disagreement then I don't see how you will get round having this drafted by a qualified professional.

In fact, it may be that a solicitor will advise that the structure proposed is not legally feasible.

I don't like giving money to lawyers as much as the next accountant but I think it is necessary here.

 

 

 

 

 

 

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Roland195 wrote:

If it was the case of a bog standard partnership agreement (if there is such a thing) then I would think you could get away with providing a template and a caveat that this is no substitute for legal advice etc that will probably keep you in the Good Lads Club with your institute.

In this case however, the complications from the structure and the fact that I would forsee it highly likely that this document will be used (possibly in court) to try to settle a disagreement then I don't see how you will get round having this drafted by a qualified professional.

In fact, it may be that a solicitor will advise that the structure proposed is not legally feasible.

I don't like giving money to lawyers as much as the next accountant but I think it is necessary here.

 

 

 

 

 

 

 

I have run this by a reputable Solicitor who is also specialised in the tax field. He had no issues with the agreement in principle (of course, I'm not suggesting that this means it's all sound though). Unfortunately, the quote provided was roughly 10% of turnover. Not something the client enjoyed hearing.

I have told them to put the feelers out to Solicitors they know.

Please don't think I'm just weighing up the options and where it may go.

To put his in perspective we are talking around 5 Partners with 2 being Senior.

From a layman's perspective I would expect that if two parties sign an agreement, that quite clearly sets out their intentions. I'm quite surprised to find that agreements can be "ignored". Is this commonplace?

 

 

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To an extent

cparker87 wrote:
I'm quite surprised to find that agreements can be "ignored". Is this commonplace?

It is not uncommon if the written agreement does not reflect the actual situation. For example, even though HMRC may agree that the "partners" in the case are in partnership for tax purposes an employment tribunal may take a different view. The existence of the written partnership agreement may be persuasive but not definitive.

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Not as simple as that

cparker87 wrote:

I have run this by a reputable Solicitor who is also specialised in the tax field. He had no issues with the agreement in principle (of course, I'm not suggesting that this means it's all sound though). Unfortunately, the quote provided was roughly 10% of turnover. Not something the client enjoyed hearing.

I have told them to put the feelers out to Solicitors they know.

Please don't think I'm just weighing up the options and where it may go.

To put his in perspective we are talking around 5 Partners with 2 being Senior.

From a layman's perspective I would expect that if two parties sign an agreement, that quite clearly sets out their intentions. I'm quite surprised to find that agreements can be "ignored". Is this commonplace?

The problem is that lawyers can reinterpret the layman's agreement with startling consequences. Been there, done that, bear the scars.

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That's what I have done in the past but...

I use the templates provided by Simply Docs and send off with obvious amendments to the client advising them (each) to get legal advice before signing.  If nothing else it prepares the clients for the key issues and means they go well prepared if & when they do see a solicitor.

In many cases though I have to say, most don't bother, sign & stick it in a drawer (or lose it).

However in a case like this I'd insist they see a solicitor because of the diverse interests and potential for missing something.  I'd also make it clear that resisting the cost of such legal advice now is likely to result in enormouse legal costs some time in the future. 

If they don't agree and you open a book on it put me down for £50!

 

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Other issues

It is important for advice in this instance - at a guess I would also expect there to be the need to specify Equity rights as a separate item, leaving the partnership, insurance requirements, retirement issues, etc etc as well as the profit sharing arrangements.

I hope there are no documents proving the tax avoidance intention as this would give HMRC carte blanche to look through the agreement.

Alternatively talk to someone who acts for a medical practice - their agreements routinely vary over time with differing seniority levels etc and would seem to fit the bill

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Drafting a partnership agreement

A late response. Just to agree you would be most imprudent to try to draft the agreement yourself: pass it to a lawyer and get brownie points for the referral.

This is not a simple agreement: you have (at least) two tiers of partner: senior and junior. Junior receive a fixed share plus % of profits. What about partners' votes on resolutions? This is just one matter that needs to be documented.

Yes, I am a lawyer; but the analogy is that I would not try to advise on Accounting Standards.

Cost of lawyer? Wild guess £1,000 to 1,500 + VAT. Individual partners may need their own advice as lawyer drafting it could be on conflict of interest to act for all.

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Most key warnings given above

Your question also references a tax avoidance rationale for the partnership. Risky.

Few accountants are qualified to draft legal agreements. Always caveat your advice re these or risk your PI cover being invalidated. (Cover typically excludes cover for duff advice given where the accountant was not qualified to provide it eg: legal advice)

You need a lawyer experienced in both partnership law AND employment law as you want the agreement to stand up to scrutiny by an employment tribunal. I understand that there have been cases where employment tribunals have overuled partnership agreements that did not reflect the true relationships between the parties.  HMRC might also then become interested in the employers' NIC avoidance too.

The client needs to understand that they cannot use a partnership agreement to override basic employment law. Either the junior partners are employees or not. The more clauses in the agreement that replicate an employment contract the greater the risks.

Disgruntled departing 'partners' often claim that they were in fact merely employees so as to benefit from the compensation available for unfair or constructive dismissal and/or if they were the subject of discrimination.

Mark

 

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You might also want to look at the CIOT guidance at paragraphs 13.10.1 to 13.10.7 see link at

 

http://old.tax.org.uk/showarticle.pl?id=3975#13.10

or your own institutes rules and guidance to satisfy yourself that you are not doing anything illegal or outside of your competence

 

 

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