What is a Partnership Agreement?
When forming a partnership, it is important to draft a partnership agreement. A partnership agreement is a legal document that outlines an arrangement made between two or more parties that intend to run a business together and share in its profits.
A draft partnership agreement is not legally required, but it is highly advisable to have. It is designed to protect ownership interest and outline the responsibilities of either partner.
It may be that you are entering into a partnership with a friend and you both have similar management structures in mind, that is all great when things are going well. But what happens when difficulty strikes? Where do you go to determine what rights you have or duties you are responsible for?
These are just some of the questions that come from not having a legal document like a partnership agreement to fall back on. It may not be problematic when you are still a small company, but when the money starts pouring in, you will want to a partnership agreement to protect your profit share.
In the end, a partnership can be a lucrative deal for both parties involved when the business is profitable. But if disaster strikes, lines between the parties involved can blur. This is where a clear-cut partnership agreement helps to avoid legal conflicts.
Here is an article with information on how to write a partnership agreement.
How Do You Draft a Partnership Agreement?
A partnership agreement is a legal document and as is the case with any legal document, you should seek the advice of a qualified lawyer for partnership agreements, before you dive in.
So that you know what to look for, let’s look at some of the partnership agreement elements broken down into three steps you would take if drafting a partnership agreement.
Define Your Partnership- Determine which type of partnership you are forming. Options include limited partnerships, limited liability partnerships, general partnerships, or limited liability limited partnerships. More on these later.
- Determine the goals of the agreement and the duration. This could be a date or a time determined by an event.
- Outline the roles each partner will play and the authority each holds in the business.
- Determine buyout options or arrangements, if any, and include a process for including new partners.
- Delineate the contribution capital each partner brings to the business partnership. this could include cash, property, or promised services.
- Quantify the ownership interests of each partner, including any stocks or shares of stock included in their share.
- Define how profits and losses will be handled between the partners
- Determine and outline any details for staffing, including operating hours, leave allowances for the employees and partners, and any other policies that would govern the work.
- Include any other decision-making permissions that could be designated to those outside the agreement, if those exist.
- Add any separate rules via clauses or provisions in the partnership agreement, i.e. a dispute resolution clause.
Here is an article to learn more about how to draft a partnership agreement.
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Do I Need a Lawyer to Draft a Partnership Agreement?
Business partner agreements are important, whether you have a small start-up or a larger business, so consideration of the details is also important. Since the agreement is a legal document, it is advisable to find a qualified attorney to draft one for you.
A qualified attorney would ensure your rights are protected and would know the legalities that you may not. You want to make sure your agreement can withstand litigation, and an experienced attorney can provide that.
Here is an article that answers FAQs about partnership agreements.
5 Things That Should Be Included in a Partnership Agreement
Did you know that some states require a partnership agreement to accompany the business filing papers? While there are many things to include in a partnership agreement, as we mentioned above, here are five things that should be part of any draft partnership agreement.
- Capital: Explicitly outline each partner’s capital contributions and percent of ownership interest they represent
- Duties: Clear authority lines need to be drawn for each partner to understand their responsibilities and decision-making power
- Profit/Loss: Details regarding profit shares and responsibilities for losses should be outlined by the partner
- Liabilities: Clear definition of who is responsible for company liabilities needs to be included, and most times, it is determined by the type of partnership being formed
- Disputes: Steps to resolve matters if they go sour should be included to protect all parties
Here is an article to learn about the important elements every business partnership should include.
Do You Need a Written Agreement for a Partnership?
Even if you have been conducting business with other parties for some time without a written agreement, the law may still see it as a legal partnership. This means you would be bound by the rules governing a partnership business, even without a written agreement.
In some states, a legal written agreement must be filed along with business formation paperwork.
Either way, to protect against potential loss and clear possible blurred lines, getting a partnership agreement in writing is highly advisable.
Here is an article that goes into more detail about whether a partnership agreement needs to be in writing.
What Are the 4 Types of Partnerships?
The four different types of partnerships you can form include:
- A general partnership : A general partnership is the basic form of partnership. Partners are co-owners and usually share the profits, losses, and liabilities equally unless a partnership agreement outlines differently.
- A limited partnership : This partnership is where at least one partner needs to be a limited partner or only responsible for one portion of the business (i.e., an investor). They usually don’t have decision-making rights but don’t share as many risks/responsibilities as the general partner. The general partner takes more of the liabilities and operational responsibilities.
- A limited liability partnership : This is a partnership where owners don’t hold personal financial responsibility for company losses. In some states, only certain professions like lawyers, doctors, and accountants, are allowed to form an LLP, so make sure you know the rules in your state.
- Limited liability limited partnerships : Here, owners are members and are protected against personal liability from the company.
Here is an article that helps you identify which type of partnership is right for you.
How Much Does It Cost to Draft a Partnership Agreement?
The cost of drafting a partnership agreement can vary based on the detail required and how long it will take to draft the agreement. However, according to data from ContractsCounsel’s marketplace, the average cost of this type of project in 2022 comes to $603.89.
Here is that article from ContractsCounsel that details the cost of drafting a partnership agreement.
If you need to formalize your partnership, look for the critical components of a business partnership agreement you’ve learned in this article. Take that knowledge to an experienced attorney to help draft the legal partnership agreement for you. Don’t skimp out on something you may regret later.
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