(4) Interest on Capital: Unless provided for in the agreement, capital contributions do not bear interest. If interest is to be allowed, the rate should be fixed.

(5) Withdrawals: As this is frequently a matter of dispute, explicit provision should be made to cover the manner and extent of withdrawals and the penalty for overdrafts,

(6) Undrawn Profits: If profits are allowed to accumulate, the agreement should state whether such amounts are to be treated as loans or additional capital. This provision is important, as clause (8) may provide that profits are to be apportioned on the basis of capital.

(7) Interest on Loans or Withdrawals: If it is desired that interest should be allowed on loans, or charged on withdrawals, so state and specify the rate.

(8) Distribution of Profits or Losses: State the method of apportioning profits or losses and specify each partner's percentage, also any contingency which may affect the share of any one.

(9) Approval of Accounts: There should be some agreement as to the approval of the individual partner's accounts in respect to withdrawals as well as to the profit and loss and capital accounts. The best way is to require each partner to sign his respective ledger account.

(10) Salaries of Partners: If any partner is to receive a stated salary, specify the amount, when to be credited, whether or not interest is to be allowed thereon if undrawn, and whether the amount is to be charged as an expense of the business before ascertaining the profit or loss.

(11) Dissolution: State procedure if partner dies or withdraws; whether books shall be balanced at once or allowed to run on to end of month or other period; whether, in case of dissolution, partners are to share losses in same proportion as each one's capital bore to entire capital.

(12) Special Causes for Dissolution: If partnership can be dissolved for other reason than death, such as disability or intemperance, state complete details.

(13) Settlement after Dissolution: It is important not only to arrange the method of determining each partner's share upon dissolution, but it is equally important to fix the details of payment. The most equitable way is to provide for full payment

within a fixed period, or to pay a certain proportion annually or semiannually. State rate of interest on balance.

(14) System of Accounts: To obviate subsequent differences of opinion as to the system of accounts, the agreement should specify that double entry accounts be kept, that they be balanced regularly, and that they be audited annually or oftener by a professional accountant. It is desirable that the method of selecting the auditor be stated.

(15) Disputes about Accounts: An arbitration clause should be inserted to the effect that if any dispute arises involving the accounts, it is to be submitted for settlement to a Certified Public Accountant to be mutually agreed upon. As disputes occur with respect to other matters as well as to the accounts, in such cases the reference should be made to a Certified Public Accountant and a lawyer, with power lodged in them to select a third party in case of disagreement.

(16) Firm Insurance: If life insurance for the benefit of the firm is to be carried on the life of one or more partners, state how the premiums are to be paid, and the disposition of the proceeds if collected. Also state the disposition if the partnership is dissolved while the policy is in force,

The following argument advanced by an insurance solicitor has enough merit in it to commend it to the attention of every professional adviser:

The alert intelligence of the American business man has discovered in life insurance a most valuable assistance in establishing his credit, and of late years the amount of insurance taken out for purely business reasons has increased enormously.

Many partnerships have been crippled by the death of a partner at a crucial period in their existence. In every properly coördinated partnership each partner is a specialist in the department over which he has immediate charge. His death not only means a loss in efficiency which competition may render dangerous, but it may also mean the withdrawal of working capital at a time when the replacing of it would be difficult, if not impossible. There are, moreover, instances where it would be especially desirable to buy out the interest of the estate of the deceased and thus prevent the embarrassment of having this interest represented by a person ignorant of the business or antagonistic to the other partners. In fact, the more highly developed and successful the copartnership, the greater the possibility of loss through the death of a partner. The indemnity which life insurance offers against such a loss is well nigh perfect, inasmuch as upon the contingency of death

the policy is tantamount to a sight draft upon the company in favor of the surviving partners.

Partnership policies may be taken jointly upon the lives of a number of partners, providing upon the death of any member of the firm for the payment of the face of the policy to the surviving members. Should the partnership be dissolved, however, the policy could, if desired, be converted into separate insurances for equitable amounts upon the lives of the individuals who had composed the firm. Or individual policies may be taken in the first instance upon the lives of each partner. Upon the death of a partner the insurance upon his life would be paid to the surviving partners, the other policies remaining unaffected. Upon a dissolution of the partnership, a partner could purchase his own policy, having it released to such beneficiary as he might elect, and continue it as his own insurance. This privilege is especially valuable when the health of the insured has become sufficiently impaired to make it impossible for him to obtain new insurance.

(17) How to Avoid Litigation: In litigation between partners it has been held that where partnership books exhibit statements of account and entries of periodical settlement and partial divisions of assets, but there has been no final accounting, this will not constitute a settlement or account stated so as to preclude a revision of the accounts.

The auditor should therefore be careful in accepting statements of clerks or one partner that the accounts were settled up to a certain date. If at any time a final settlement had been made the words "final settlement to this point" would seem to be necessary to preclude the reopening of the accounts in the event that any subsequent dispute should arise.

"The binding force of an account stated will not be given to the mere furnishing of an account or other transaction which was not with a view to asserting a claim, establishing a balance due, or finally adjusting the matters of account between the parties." (Cyc. 1; 367.)

AUDIT OF CORPORATIONS

In the United States the auditor is usually appointed by the directors, although in most small corporations the directors and officers are identical and the appointment comes from one who acts in the capacity of an officer.

Officers and Directors: It is always a question as to how far a professional auditor should go in giving advice. Some

accountants of long experience and large practice unqualifiedly recommend that an auditor's duty is to state facts, and facts only, and that inferences therefrom as applied to past or future are not to be drawn by professional auditors.

The author feels, however, that this is another point in practice where an auditor can frequently be of substantial assistance to his client by going somewhat beyond the facts and figures, and stating modestly and without prejudice the effect certain methods have had, or may have in the future.

This advice may be objected to occasionally and a client or two may be lost, but experience has demonstrated to the author that a great majority of business men feel so helpless about their accounts that they welcome any intelligent and constructive comments, criticisms, and advice which their auditor deems it wise to impart.

If the auditor does not have the full confidence of his client, the connection is not likely to be a permanent one; if confidence is reposed in him, it is considered entirely proper for business advice to be contained in a report.

Officers: Many officers of close corporations, holding all or nearly all of the capital stock, are apt to consider the business theirs, and run it as a partnership. Any bad consequences of this custom seem improbable, particularly so long as the corporation is making a profit, but as no one can foretell the future, and as so many prosperous corporations meet with reverses and subsequently go into bankruptcy, there is an obvious duty upon an auditor to advise the officers of close corporations that, for the sake of their own good names, all transactions of a corporate nature should be conducted with more formality than if no such restriction existed.

This applies particularly to the matter of compensation and dividends. In a vast number of corporations these items are handled without any formality whatever; it is considered too much trouble to have a meeting of the board of directors, so a verbal agreement is made; and once started, the practice continues. It should, therefore, be pointed out, in a tactful and friendly way, that strict observance of the law with respect to all matters in which the relation of the officers to the corporation is concerned is advisable from every standpoint.

As an example of this advice it should be noted that an officer cannot fix, nor participate in the fixing, of his own salary or other compensation.

In close corporations officers do not hesitate to loan money to carry on the business where the capital paid is insufficient. Frequently their personal accounts represent credit balances throughout a long period. Interest is usually credited thereon at six per cent unless a lower rate is arranged for. In the event of litigation with directors or stockholders who control or (as is often the case) who own one half the capital stock, and where control is divided, the status of these loans may be questioned.

In one case, not yet decided, two directors loaned large sums to a manufacturing corporation to enable it to produce a large quantity of machinery. The corporation consolidated with a competitor and received securities for its property. These securities were the sole asset of the old company and were valuable but not marketable. The directors who had loaned the money brought suit, alleging that the sums advanced were demand loans and were due and payable, and demanded that the securities be sold for what they would bring and their loans paid in whole or part out of the proceeds.

The other directors resisted the suit and claimed that it was understood that the loans were in the nature of additional capital, and while they were a first lien on the assets, yet a sale of unmarketable securities would be equivalent to a liquidation of the business, which was not contemplated and which would wipe out any equity the capital stock might have.

It may be a year or two before this case is decided. If an auditor had foreseen this result and had suggested that promissory notes be issued from time to time with definite due dates, the trouble would have been averted. This advice would have been bad for the lawyers but extremely valuable to the client.

The laws of the different States vary to such an extent in respect to the rights and duties of officers and directors that no attempt is made here to do more than suggest a starting point.

Directors: The foregoing remarks apply with particular force to directors who are also officers. Where a director receives no compensation, except perhaps a small attendance fee, the warning as to participation in meetings is not so pertinent, but it fre