How to Create a Supplementary Deed in a Partnership Involving a Sleeping Partner

Starting a business with a group of individuals requires careful planning, especially when you involve partners who have different roles. One common scenario is a partnership where one partner acts as a sleeping partner – an individual who invests the capital but does not participate in the day-to-day operations. It's essential to address this scenario in a supplementary deed to ensure fairness and clarity for all parties involved.

Understanding Partnership Types

Before diving into creating a supplementary deed, it's important to understand the different types of partnerships:

Money-Only Partner: This individual invests capital but does not participate in the day-to-day operations or decision-making. Work-Participating Partner: This individual not only invests capital but also participates in the day-to-day operations and decision-making process.

Creating a Supplementary Deed for a Sleeping Partner

A supplementary deed is a legal document that outlines the specific terms and conditions for a partnership, especially when one partner is not involved in the day-to-day operations. Here's how to create one:

1. Define the Roles and Responsibilities

Clearly define the roles and responsibilities of each partner in the partnership agreement. For a sleeping partner, their role should be limited to providing capital without involvement in the operations. If one partner is a sleeping partner, the other partners may take on additional roles to ensure the business runs smoothly. For example:

Part A (Sleeping Partner): Invests capital Part B (Active Partner): Oversees sales and marketing Part C (Active Partner): Manages accounting and finances

This division helps to ensure transparency and avoids any misunderstandings.

2. Define the Financial Contributions and Distribution

Outline the financial contributions made by each partner and how profits and losses will be distributed. This is crucial, especially when one partner is a sleeping partner. For instance:

Part A (Sleeping Partner): 40% of capital contribution, 20% profit distribution Part B (Active Partner): 30% capital contribution, 60% profit distribution Part C (Active Partner): 30% capital contribution, 20% profit distribution

Make sure to include a clear timeline for these agreements to ensure they are regularly reviewed and updated.

3. Set a Clear Timeline for Review

To maintain transparency and fairness, it's important to set a clear timeline for reviewing and updating the terms of the partnership. A one-year review is common, but this can be adjusted based on the specific needs of the partnership. Include the following:

A specific timeframe for review, e.g., annually or every three years Provisions for renegotiation of terms and conditions Details on how profit distributions and roles may change over time

For instance, a partnership agreement might state that the current profit distribution and roles will be reviewed annually, with changes taking effect at the start of the next financial year. This ensures that both parties have input and can adjust the arrangement as needed.

4. Include Provisions for Best Practices

Incorporate provisions to ensure best practices are followed, especially when one partner is a sleeping partner:

Maintain regular communication and transparency: Regular meetings and updates to ensure the sleeping partner is informed and involved in a meaningful way Set performance expectations: Define what the sleeping partner should achieve in terms of capital contributions and expected returns Establish exit clauses: Include provisions for the sleeping partner to exit the partnership under certain conditions, such as significant poor performance or non-payment of capital contributions

5. Legal and Compliance Considerations

Finally, ensure that the supplementary deed complies with relevant legal and regulatory requirements. Consider seeking legal advice to make sure the document is sound and covers all bases:

Check local business registration laws Ensure the document complies with tax regulations Include dispute resolution mechanisms, such as arbitration or mediation

By creating a well-defined supplementary deed, you can avoid conflicts and ensure that all partners are clear on their roles, financial contributions, and the future of the partnership.

Conclusion

Creating a supplementary deed for a partnership involving a sleeping partner is crucial for maintaining fairness and transparency. By defining the roles, outlining financial contributions, setting timelines for review, and including legal and compliance considerations, you can build a strong foundation for your partnership. This ensures that all partners have clear expectations and can work together effectively towards the success of the business.