What Is a Written Partnership Agreement?
A partnership agreement is a legal document that outlines the way a business partnership or legal entity is run. It details the relationship between its partners, defines assets, profit shares and liabilities for each partner.
Partnership agreements can be called different names, some of which include:
- Business Partnership Agreement
- General Partnership Agreement
- Partnership Contract
Partnership agreements establish clear expectations for the partners involved related to rules for how the partners will manage the business.
Learn more about partnership agreements .
How To Write a Partnership Agreement – Step by Step
These are the steps you can follow to write a partnership agreement:
- Step 1 : Give your partnership agreement a title. Make sure it reflects the type of partnership being formed. These can be limited partnerships , limited liability partnerships , general partnerships or limited liability limited partnerships .
- Step 2 : Outline the goals of the partnership agreement.
- Step 3 : Mention the duration of the partnership
- Step 4 : Define the contribution amounts of each partner (cash, property, services, etc.).
- Step 5 : Define the ownership interests of each partner (assets such as stocks or shares).
- Step 6 : Outline management roles and terms of authority of each partner.
- Step 7 : Add accounting obligations of each partner, if applicable.
- Step 8 : Provide details on the distribution of profits and losses between the partners.
- Step 9 : Detail the salaries, work hours, sick leave and vacation policy for each partner.
- Step 10 : Add permissions and restrictions on any outside business activity for any partner, if applicable.
- Step 11 : Include information about the partners’ buyout options, if any.
- Step 12 : Include the process for adding new partners or removing original partners.
- Step 13: Add clauses and provisions. Clauses and provisions set separate rules for certain special circumstances. One such example is a dispute resolution clause. The dispute resolution clause is used to define the partner with the decision-making power in case of a dispute and to outline the dispute-resolution process.
- Step 14 : Add terms and conditions under which the partnership can be terminated.
Here is an article on the process of drafting your own partnership agreement.
What Should Be Covered in a Partnership Agreement?
A partnership agreement can be modified to reflect the needs of the partnership being formed. However, there are some key elements common in most partnership agreement. Here are some of them:
- Percentage of Ownership : The agreement can be used to reflect the commitment of each partner to the business. Some partners might prefer to cover startup costs or contributions of equipment, and services or property and these can be pledged within the partnership agreement. These contributions often dictate the percentage of ownership each partner has in the business.
- Division of Profit and Loss: The agreement is also used to define the share of profits and losses between each partner, either based on ownership or equally. This can help avoid conflicts in the future.
- Length of the Partnership : The partnership agreement should also include the information about the length of the partnership. If partnerships are being formed for an unspecified amount of time it can be stated in this section. Sometimes, partnerships can dissolve after meeting certain milestones and the partnership agreement can reflect the same.
- Decision Making and Resolving Disputes : Conflicts in partnerships often arise because of unclear decision-making powers and dispute resolution mechanisms. This can be prevented by clearly detailing the decision-making process and dispute resolution process within the partnership agreement.
- Authority : Partner authority or binding power should be defined within the agreement. This should detail the terms and circumstances under which the partners can bind the company and outline the process of doing so.
- Withdrawal or Death : The partnership agreement should also outline the procedure for handling the departure or death of a partner. This could include the buy and sell agreement with the valuation process or redistribution of company assets and changes in ownership.
What does a partnership agreement cost ?
Types of Business Partnerships
A general partnership is the most basic form of a business partnership. A general partnership does not require forming a business entity with the state. The partners form the business by signing a partnership agreement. General partnerships are easy to form as well as dissolve. Most partnerships dissolve when any partner dies or goes bankrupt.
Generally, ownership and profits are split evenly among the partners. This doesn’t mean that they will also have even ownership. The partners have independent authority to bind the business to contracts or loans. All partners also have total liability, making them responsible for all of the business's debts and legal obligations.
Limited partnerships are formal business entities that need to be authorized by the state. They have at least one general partner who is liable for the business and one or more limited partners who provide money but do not manage the business. Limited partners invest in the business for monetary returns. They are not responsible for the debts and liabilities of the business. Such silent partner limited liability is used when limited partners can share in the profit, but cannot lose more than they've invested.
Limited Liability Partnership
A limited liability partnership works like a general partnership where all partners actively managing the business, but they have limited liability for each another's actions. The partners bear full responsibility for the debts and liabilities of the business, but are not responsible for errors made by other partners.
Limited liability partnerships are not permitted in all states. Some professions where limited liability partnerships are used are medicine, law, and accountancy.
Limited Liability Limited Partnership
A limited liability limited partnership operates like a limited partnership where at least one general partner manages the business, but the limited liability limited partnership limits the general partner's liability so that all the partners have protection.
A limited liability limited partnership is only available in some states. These states are, Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Minnesota, Missouri, Montana, Nevada, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Texas, Virginia, Washington, and Wyoming. Since they are not recognized by all states, companies that function in multiple states might not be able to use them.
Here is more on types of partnership agreements.
Who Writes Partnership Agreements?
A partnership agreement is generally written by the company forming the partnership. It works like a corporation’s articles of incorporation because it establishes how the business will function and run. Companies generally use their in-house counsel to draft the partnership agreement. Other partners can also make contributions and negotiations before agreeing to it and signing it.
If you are a business owner, looking to draft your own partnership agreement, you can do so using free templates available online. It is advisable to contact a business lawyer or a partnership agreement lawyer to ensure that the agreement follows the federal, state and local laws.
Get Help with a Partnership Agreement
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