PREPARING A PARTNERSHIP AGREEMENT: 5 KEY MATTERS WE OFTEN FORGET TO INCLUDE

By Ameli Inyangu & Partners Advocates

A partnership agreement is the foundation of a successful business collaboration. While most agreements cover basic aspects such as capital contributions, partner roles, and profit-sharing ratios, certain critical provisions are often overlooked. Failing to include these clauses can lead to conflicts, uncertainty, and potential legal disputes down the line.

To ensure a well-structured and sustainable partnership, here are five essential but often forgotten clauses that should be included in every partnership agreement.

1. Procedure for Admission of New Partners

Most partnerships start with a defined group of partners, but as the business grows, there may be a need to bring in new members. Unfortunately, many agreements fail to outline a clear process for admitting new partners.

Why This Matters:

• Without a structured admission process, existing partners may face conflicts over who qualifies to join and under what terms.
• Clear provisions help maintain consistency, transparency, and fairness in decision-making.

What to Include:

• Criteria for new partners (e.g., financial contribution, industry expertise).
• Approval process (majority vote, unanimous consent, or other voting structures).
• Adjustment of profit-sharing ratios upon admission.

Example: If a law firm expands and wants to bring in a new equity partner, the agreement should specify how much capital the new partner must contribute and whether existing partners must unanimously approve their entry.

2. Expulsion of a Partner

While no one enters a partnership expecting conflicts, situations may arise where removing a partner becomes necessary. A well-drafted partnership agreement should explicitly outline the grounds and process for expulsion.

Why This Matters:

• A partner may become a liability due to financial troubles, misconduct, or inability to fulfill their obligations.
• Without a structured process, the remaining partners may struggle to remove a problematic partner without legal repercussions.

What to Include:

• Grounds for expulsion (fraud, long-term illness, professional misconduct, or breach of the partnership agreement).
• Voting requirements (majority or unanimous vote for expulsion).
• Settlement process for the expelled partner’s share.

Example: If a partner in a consulting firm is found guilty of financial fraud, the agreement should outline how they can be expelled and how their share in the firm will be handled.

3. Determining the Share of an Outgoing Partner

At some point, a partner may choose to leave, be expelled, or pass away. The partnership agreement should specify how their share of assets and profits will be treated to ensure a smooth transition.

Why This Matters:

• Without a clear exit strategy, disputes may arise over valuing the outgoing partner’s interest.
• An unstructured exit process can cause financial strain on the remaining partners.

What to Include:

• Whether the remaining partners can acquire the outgoing partner’s share.
• The method for valuing partnership assets (e.g., independent financial valuation).
• Payment structure for the outgoing partner’s share (lump sum vs. installment-based payout).

Example: In a real estate partnership, if a partner decides to retire, the agreement should detail how their interest in properties owned by the partnership will be valued and transferred.

4. Restrictions on Competition

Partnerships often involve valuable business knowledge and client relationships, so it's crucial to prevent departing partners from competing unfairly. A non-compete clause should be included to protect the firm’s trade secrets and goodwill.

Why This Matters:

• Without a competition restriction, a departing partner could set up a rival business, taking clients and employees with them.
• Courts only enforce reasonable restrictions, so geographical scope, duration, and client base must be carefully considered.

What to Include:

• Restrictions while in the partnership (partners should not operate competing businesses).
• Post-exit restrictions (defined time period, specific geographical locations, or limited client engagement).
• Exceptions where the restriction does not apply (e.g., if the partnership dissolves entirely).

Example: A marketing agency partnership agreement could prevent a departing partner from soliciting the agency’s clients for two years within the same region.

5. Dispute Resolution Mechanism

Disputes are inevitable in any business relationship, and partnerships are no exception. A well-defined dispute resolution clause helps partners resolve conflicts efficiently without resorting to lengthy and costly litigation.

Why This Matters:

• Disputes that escalate into lawsuits can strain relationships and disrupt business operations.
• Alternative dispute resolution (ADR) methods such as arbitration and mediation provide a confidential and cost-effective way to resolve conflicts.

What to Include:

• Preferred dispute resolution method (mediation, arbitration, or litigation).
• Appointment of a neutral third-party mediator/arbitrator.
• Binding vs. non-binding resolution outcomes.

Example: A financial consultancy partnership agreement could require disputes over profit-sharing to be settled through arbitration before considering court action.

Final Thoughts: Strengthen Your Partnership Agreement

A comprehensive partnership agreement is essential for creating a stable, transparent, and legally sound business structure. By including these often-overlooked provisions—admission of new partners, expulsion processes, exit strategies, competition restrictions, and dispute resolution—you can minimize risks, protect business interests, and foster long-term success.

For expert legal guidance on drafting a robust partnership agreement, contact us at Ameli Inyangu & Partners Advocates.

Contact Us:

• Email: [email protected]
• Phone: +254 722 367 647