Law & Regulation
Warren Buffet, Steve Jobs and
accountancy partnerships
BY
Dr Michael Twomey
Warren Buffet, Steve Jobs and
accountancy partnerships
Dr. Michael Twomey highlights some famous partnerships and how the
same partnership principles can apply to most Accountancy Practices.
Dr. Michael Twomey is
a solicitor and author of
the leading authority on
partnership law in Ireland.
(Twomey, Partnership Law,
Bloomsbury Professional).
He specialises exclusively in
partnership law, advising on
the drafting of partnership
agreements and on
partnership disputes:
[email protected]
Accountants will come across partnerships
either directly in relation to their own
practices, which are often carried on
through partnerships, or indirectly in
relation to their client’s affairs, many of
which will be in formal partnerships (such
as solicitors, doctors, dentists, vets etc) or
informal partnerships (such as investment
or business ventures which although called
joint ventures, co-ownerships, syndicates
etc, will legally be partnerships).
Therefore the principles of partnership law
(contained in the Partnership Act 1890, the
Limited Partnerships Act 1907 and the
relevant caselaw) will be of relevance to
accountants, both directly and indirectly.
However, as partnership law is not the most
riveting of subjects for many practitioners,
a more interesting way to consider these
partnership law principles is to do so by
considering some of the more famous
partnerships in recent times, since the
principles applicable in those cases are just
as applicable to a two person accountancy
partnership in rural Ireland as to they are to
partnership involving the Warrant Buffets
and Steve Jobs of this world.
Warren Buffet and limited partnerships
For those with an interest in investments,
Warren Buffet will be recognised as the
greatest fund manager in the world, having
grown his enormous wealth primarily
from buying stocks on the New York Stock
Exchange. However, it is worth noting that
Buffet began and grew his investment
empire through limited partnerships.
This is because when Warren Buffet
graduated from Columbia University in
his twenties (after studying under the
investment guru Benjamin Graham), he
went back to Omaha to start investing in
stocks. To do so, he set up his first limited
partnership with himself as the General
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Partner, having contributed $100 in capital
and the rest of the capital of $105,000
came from seven limited partners, being his
family and friends. This limited partnership,
Buffet Associates Limited, started investing
in the 1950’s and grew year on year to form
the basis for Buffet’s investment in later
years in Berkshire Hathaway, which now is
worth many billions of dollars.
Soon after forming his first limited
partnership, Buffet approached other
investors for further capital to enable
him form another limited partnership,
on the basis that the investing limited
partners would get all the profits on their
investment up to 4%, and Buffet would get
no commission, fee or other payment if
fund only made 4%. However, thereafter the
profits were to be shared 75% to the limited
partners and 25% to Buffet. In this respect
Buffet was and remains the atypical fund
manager, he was not getting paid any
commission or fees if the fund did not
perform. In a world where fund managers
and stockbrokers get paid regardless of
performance, this approach, which he
introduced in the 1950s, remains an oddity.
Buffet was the fund manager with ‘skin in
the game’, since he only got paid if the fund
performed. If the fund did not perform, as
he explained, he ‘got nada’.
The limited partnership that Buffet chose
as his investment vehicle of choice for
fund management is just like the limited
partnership which is available in Ireland
today (under the Limited Partnerships
Act 1907). These partnerships offer
investors limited liability while at the same
time giving them the tax advantages of
partnership, since unlike a company, the
limited partnership is see-through for tax
purposes. In every limited partnership,
there is at least one limited partner with
limited liability and at least one general
partner, which has unlimited liability
(however this general partner can itself be
ACCOUNTANCY PLUS. ISSUE 03. SEPTEMBER 2013
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Law & Regulation
BY
Warren Buffet, Steve Jobs and accountancy partnerships
a limited company, so that the entity with
unlimited liability, the general partner, can
itself be a limited company). As Buffet was
not concerned about unlimited liability,
since he was simply investing in stocks, he
personally was the General Partner, rather
than a limited company
In a limited partnership, it is the general
partner who runs the limited partnership
while the limited partners invest their
capital, akin to shareholders in a company
and these partnerships are commonly
used in Ireland, because of the fact that
they have both tax advantages and limited
liability, and therefore continue to be
suitable vehicles for venture capital and
other investment purposes.
Dr Michael Twomey
later, he withdrew from the partnership
in return for a payment of $800. That 10%
stake in the company would at its height
have been worth several billion dollars.
However, Wayne’s bad luck was not limited
to selling at under value his equity in Apple,
since he also sold the original Partnership
Agreement at undervalue. In 1994, he sold
on the original Partnership Agreement from
April of 1976 for ‘several thousand dollars’,
only for it to be auctioned by Sothebys in
2011 for €1.6 million.
Steve Jobs and ordinary partnerships
From the greatest fund manager in the
world to what up to recently was the most
valuable company in the world, Apple.
This business, like many other business
started off as a partnership when on 1 April
1976, Steve Jobs, Steve Wozniak and Ron
Wayne set up the Apple partnership. Ron
Wayne, although not a lawyer, took on the
task of drafting the two page partnership
agreement as he claimed to have experience
in ‘writing legalese’ and under its terms the
shares of equity in the firm were shared 45%
to Jobs, 45% to Wozniak and 10% to Wayne.
The partnership was set up as an ordinary
partnership, where unlike in a limited
partnership, all the partners have unlimited
liability for the debts and liabilities of the
firm. This fact caused Ron Wayne to get
cold feet after signing up to the Partnership
Agreement and as a result, just 11 days
The ordinary partnership set up by Jobs,
Wozniak and Wayne in 1976 in California is
much the same as the ordinary partnership
available in Ireland under the Partnership
Act 1890. This form of business vehicle
continues to be popular for start-up
operations because of the privacy and
flexibility which ordinary partnership offers,
since unlike a company, a partnership
is not obliged to file accounts and it has
no restriction on returning capital to its
partners and is not subject to the myriad of
company law provisions (since the partners
agree to take on unlimited liability).
Conclusion
While partners in accountancy partnerships
in Ireland are unlikely themselves to have,
or to act for clients who have, the profile
of Buffet or Jobs, nonetheless similar
principles as applied to these famous
partnerships will apply to them and their
clients who are in partnership.
This is worth bearing in mind, particularly as
in some cases many clients of accountancy
firms will be in property or other
investment ventures, which will legally
be a partnership, yet the clients may not
appreciate this fact.
For these clients and for partners in
accountancy firms themselves, perhaps the
most important thing to understand is that
all the terms of the Partnership Act 1890
will automatically apply to that partnership
relationship (even if it is a limited
partnership under the Limited Partnership
Act 1907, although with some modification),
unless specifically excluded by the parties.
As many of the terms automatically implied
by the Partnership Act 1890 partnership
law are inappropriate, the most important
thing for every partner to do is to ensure
that they have a well drafted partnership
agreement that replaces the implied terms
of partnership law with terms that are
appropriate for their partnership.
Undoubtedly the most important term in
every partnership agreement is the clause
dealing with the end of the partnership.
This is because the only thing that is
guaranteed in every partnership is that it
will end. Accordingly having clear terms
about how the partnership can be ended
and the consequences of ending the
partnership is crucial, since it is guaranteed
to apply at some stage.
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