what does the partnership agreement say? oops …
by ed mendlowitz
202 questions and answers: managing an accounting practice
question: my partner has been out sick for the past 3½ months, and he has been continuing to get his draw. it looks like he will be out for some time more, but not sure how long.
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he does make some calls from home, but isn’t really doing any work. is there anything i can do?
response: my first reaction is that a partnership agreement would cover this, but they don’t have one. i started to discuss what would be in an agreement if they had one and perhaps they should deal with this issue accordingly.
i suggest that agreements provide for full draw or salary for three months, and half salary for three months thereafter, and then nothing until they return on the same basis as before the illness or disability. if they continue to not perform for 18 months in a 24-month period, then the buyout provisions get activated. during this period, they will still participate in the profits at their regular percentage. note that the profits will be higher because of their reduced salary payments, and they will share in that based on their percentage.
the easy part is described above. the hard part is telling them. you need to do it and the sooner the better. if there is a fight or disagreement, deal with it now.
you were both negligent in not executing an agreement and now you need to deal with the unpleasantness arising from this neglect.
by the way, each of the partners should be responsible for obtaining personal disability income policies and these usually kick in after three months. cutting their draw should not cause your partner undue financial hardship.
a lesson here is to draw up an agreement if you do not have one. and get it done now – it is necessary, important and will make your life better!