Sheila and Rob mutually decide to start a business together. Being close friends, they do not enter into a written agreement and agree to split all responsibilities and profits equally

Question

However, Sheila soon finds herself saddled with more than her share of work. She now resents splitting the profits equally since her contribution to the business is more. This has affected Rob and Sheila's friendship. What form of business organization is followed by Rob and Sheila? What should they have done to prevent any misunderstandings between themselves? Can Sheila legally claim a greater share of profits?

Answer 1

Sheila and Rob are in a general partnership. A partnership is a voluntary association of two or more persons formed to carry on a business as co-owners for profit. In many partnerships, there is initially no written partnership agreement; the partners informally split the capital contribution and work between them. In the absence of a written agreement, the Uniform Partnership Act (UPA) controls. The UPA requires partners to share profits equally. Sheila can therefore not claim more than 50% of the profits legally. To avoid conflicts over management responsibilities, borrowing power, profit sharing, and other common bones of contention in a partnership, Sheila and Rob should have set out the rights and responsibilities of each partner in a written partnership agreement at the outset. This agreement should have included the following: name and address of partnership; name and address of partners; purpose of partnership; duration of partnership; amount and type of investment of each partner (e.g., cash, realty, services); loans to partnership; how profits and losses are to be shared; management and voting power of each partner; method of settling disputes that should arise; cross-insurance of partners; duties of each partner; how books are to be set up and maintained; banking arrangements—who has authority to deposit and withdraw; who has authority to borrow money in the name of the partnership; and who does the hiring and firing of employees.