A partnership agreement is an internal business contract that outlines business practices for the partners of a company. This document helps set the rules and standards for how the partners will manage several elements of the relationship, such as:
- Business responsibilities
- Ownership and investments
- Profits and losses
- Company management
A partnership is one of the closest legal arrangements you can enter into with another person or persons. You are linking yourself to your partner or partners financially. In many other ways, it’s critical that you have a legally binding contract that sets out all the terms of that relationship.
While the details may vary, most partnership agreements share the same basic format.
Here are 13 things to include in a partnership agreement.
1. Name of Business
The first important thing your partnership agreement needs to include is the name of the affected business. Businesses that are registered corporations are separate legal people, so the business's name must be included in the document.
2. Business Purpose
A partnership agreement will also usually include a paragraph outlining what the business will do and its goals. This might also include information about the business's location, the area it serves, and other details.
3. Length of Partnership
4. Capital Contributions
Most partnership agreements include some kind of financial contribution or investment from the parties involved. These will be outlined in a document section comprising all parties' capital contributions.
5. Ownership Interest
Financial contribution and ownership interest are usually linked, but not always. It’s standard practice to have a specific contract section that details ownership percentages.
6. Profit and Loss Distribution
Profit and loss distribution is linked to the ownership interest of each partner. However, that is not always the case. Therefore, it will be included in the partnership agreement to ensure that this is completely clear to everyone.
7. Management and Voting Structure
Being a business partner does not mean all partners will manage business responsibilities. Sometimes, partners might have limited input in the business’s day-to-day running. They may also have limited information when a vote takes place.
This should all be included in the contract that creates limited liability partnerships.
8. Partner Addition or Removal
Businesses don’t always stay the same. Over time, business responsibilities might change, and you could add or remove partners from the agreement. Your partnership agreement should include a section on the process to do this.
9. Dispute Resolution
Most contracts include a section on dispute resolution rules, and partnership agreements are no different. Therefore, they should always include details about the process of settling disputes.
Another important part of business ownership is how and when the partnership will dissolve. Often, there will be a list of events that might trigger a dissolution and the process of dissolution itself.
11. Partnership Tax Elections
In any business, company management doesn’t always agree on every element of running the business. For example, taxes are often a sticking point, which is why most partnerships usually include details of how the company will pay its taxes.
12. Death or Disability
Unfortunately, death and disability do happen, and they sometimes happen to people who own and operate businesses. As a result, most partnership agreements include sections that outline how the company will continue to operate if one or more partners die or are disabled.
13. Partner Signatures
Finally, for any contract to be legally binding, it must be signed and dated by each party. Usually, you will also need to include one or more witnesses in the agreement.
There’s a lot that goes into drawing up a partnership agreement. Negotiation is often involved before the document is finalized and ready for signature. Sometimes, this is included in the partnership agreement cost, with each party able to request changes and amendments before they agree to sign.
Partnership agreements might seem distasteful, particularly if you are going into business with a friend or family member. However, they are critical to ensure that everyone understands the terms and conditions of the partnership.
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