One signature on a partnership joint account

[Purple]

A friend of mine started a partnership last year and has found out that his partner is writing cheques for personal expenses from their joint account. When he asked their accountant about it the accountant said that it was fine as he would treat it as income for the other partner at the end of the year. The accountant was brought to the table by the other partner.

To me there are a number of issues;
1) It is very bad practice not to separate personal and business accounts.
2) It shows a lack of integrity in a cash business that could have serious consequences if continued.
3) (And most importantly) this was done without the knowledge of my friend which shows a lack of honesty by the other partner. He is not sure if his partner was actually going to let him know about the payments of if the accountant and his partner are now covering their asses. He no longer trusts his partner.
4) There are numerous other small issues which, to me, show a lack of professionalism and a lack of commitment to the partnership.

I have advised that he should dissolve the partnership ASAP and set up on his own.
I have also suggested that he meet with the bank manager and find out how cheques from a joint account where cleared with only one signature.
Am I over-reacting?

 

[Brendan Burgess]

Re: One signiture on a partnership joint account

The bank follows the mandate given to it by the partnership. If the mandate allows cheques to be honoured with only one signature, then the bank has to do so.

His first step should be to change the mandate so that both signatures are required.

If the partnership works well otherwise, they should attempt to repair the damage done. If not, they should split. A partnership is very dangerous in that each partner is liable in full for the business debts of the partnership.

Brendan

 

[Purple]

Re: One signiture on a partnership joint account

Thanks Brendan,

The problem is that the partnership is not working well. The other partner is not doing the hours and clients are not being serviced because he's not there when he should be. His professional skills are also questionable. My friend has generated over 70% of the business in the first 12 months and this proportion is increasing. I think that he will be carrying his partner for the next 20 years if he is not careful.

 

[z108]

Re: One signiture on a partnership joint account

His professional skills are also questionable. My friend has generated over 70% of the business in the first 12 months and this proportion is increasing. I think that he will be carrying his partner for the next 20 years if he is not careful.

His professional skills may be in doubt but his skills at manipulating your friend and the situation seem rather better.
Is there a comprehensive partnership agreement which may stipulate how the accountant gets chosen or how and when a partner is paid etc? I agree with Brendan that: 'His first step should be to change the mandate so that both signatures are required.'
However I dont think any partnership can survive long when one partner doesnt trust the other. Its probably time to get all issues into the open with a view to either resolving them or else dissolving the partnership.

 

[Purple]

Re: One signiture on a partnership joint account

His professional skills may be in doubt but his skills at manipulating your friend and the situation seem rather better.
Is there a comprehensive partnership agreement which may stipulate how the accountant gets chosen or how and when a partner is paid etc? I agree with Brendan that: 'His first step should be to change the mandate so that both signatures are required.'
However I dont think any partnership can survive long when one partner doesnt trust the other. Its probably time to get all issues into the open with a view to either resolving them or else dissolving the partnership.

I agree
But my friend doesn’t want to cause a confrontation.
They have no formal partnership agreement in place.
I couldn’t believe it when he told me this but as they have no capital assets it may not be a bad thing if they split.
I have been giving strong advice on this and am posting here to get other opinions in case I am going over the top.
I have also advised that he change the mandate. He is adamant that two signatures are required. I said that he should check that with the bank today and if two are required find out how the cheques have been processed.

 

[Vanilla]

Re: One signiture on a partnership joint account

I agree

They have no formal partnership agreement in place.

This is dangerous for your friend and should be rectified immediately. Whether this should be by means of a split now or implementing an agreement is up to your friend.

Personally I feel the greater issue here is not the cheques for personal use (surely this would always have to be corrected via the end of year accounts?) it's the fact that your friend is working harder and generating more business than his partner but presumably is splitting the profit evenly. Either they put in place a means of measuring and dividing income production fairly or really your friend should contemplate a split now before it could potentially become very costly.

 

[Purple]

Re: One signiture on a partnership joint account

The bank follows the mandate given to it by the partnership. If the mandate allows cheques to be honoured with only one signature, then the bank has to do so.

His first step should be to change the mandate so that both signatures are required.

Just spoke to the friend about this again. He checked with the bank and both signatures were required (but only one was on the cheques. The bank was dismissive about this saying that they process thousands of cheques every day and couldn't be expected to notice things like this. I was surprised at this, to say the least.

He also told me that the other partner has been paying for shopping, personal car insurance, deposit on holiday etc out of their joint account. Over half their earnings have been cleared out and the accountant is aware of it. This is the same accountant that advised them both at a meeting just after Christmas that they should not draw a wage for the first 6 months to let equity build up!
If I did not know this guy for the last 20 years (man and boy as they say) and know how straight he is I would not believe what he has been telling me.

I am now wondering if his partners actions are criminal (I don't think they are but I'm not sure).
I would also like to be able to advise him if the bank is liable in any way for processing the cheques.