The Importance of Partnership Agreements

Every successful CPA firm should have policies for addressing major practice issues. The preparation and periodic review of a CPA firm's partnership agreement is critical to practice success. A properly drafted and comprehensive agreement that is updated regularly can prevent or minimize many problems that otherwise might arise as the practice develops. Because a partnership is intimately involved with the partners' personalities, no two partnerships are exactly the same. Thus, no model partnership agreement can cover the many concerns, goals and management styles and practices of every accounting practice. Nevertheless, all partnership agreements should address certain matters.  Although the statement of purposes may seem to be a rather straightforward provision, it is important the agreement set forth the specific businesses in which the partnership will engage. Because the scope of accounting practices has expanded over the years, many agreements should be amended to encompass the resulting changes. Today, most accounting partnerships include business consulting as an integral part of their practices, along with traditional services. Other practice areas may include recruiting, outplacement, litigation support and business valuation. Because the risks involved in each of these areas are not the same, it is important for each partner to understand and support the businesses in which the partnership will engage. Considering each partner's significant potential liabilities for partnership services, each must fully understand the risks he or she is undertaking by becoming or remaining a partner and by agreeing to the firm's involvement in various practice areas. Outside business activities should be specifically prohibited unless approved by a partner vote. Outside opportunities, such as investments in the firm's real estate or other business ventures, might best be made through separate partnerships in which partners may or may not choose to participate. NONCOMPETITION Probably one of the most difficult provisions to negotiate, as well as to enforce, is a noncompetition provision. Two time periods must be considered when drafting them: the partner's tenure in the partnership and the period afterward. The agreement should specify each partner's obligations to bring all business opportunities to the partnership and refrain from diverting partnership business to his or her own account. It also may describe situations in which a partner can engage in an economic activity for his or her own benefit, such as adjunct teaching. Even in these circumstances, however, the agreement should include some guidance to prevent partners from devoting excessive time to outside activities. The more problematical provisions are those that restrict partners from competing with the partnership after they leave it. Restrictions may differ, depending on the nature of the termination. For example, stricter noncompetition provisions may apply in a voluntary termination than in retirement. Enforcement of these types of provisions is difficult and most courts will not prevent an individual from earning a wage. An absolute noncompetition clause must be drafted carefully to cover a reasonable time period and geographic area. If a court determines the time period is too long or the geographic area too large, it will not enforce the provision; courts rarely alter provisions to make them enforceable. A partnership may have better luck enforcing a provision that deters a partner from taking partnership clients, but the client has the right to decide who is to act as its accountant. Nevertheless, a departing partner can be required to provide a notice of withdrawal a specified period of time beforehand and may be prohibited from contacting clients before notifying the partnership so the firm can contact its clients to retain their business. …

Field of study: Business