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What Is A Business Partnership Agreement?
A business partnership agreement, also known as a partnership contract or articles of partnership, is a legally binding document that determines the roles and responsibilities between two individuals or entities acting as business partners. For partnership agreements to be enforceable, they should contain specific elements and provisions that comply with local, state, and federal contract law.
What Is A Business Partnership?
A business partnership is a formal agreement between two parties operating and managing a company and share in its profits or losses. While there are risks associated with business partnerships, they can flourish successfully and generate significant revenue for both partners.
Business partnerships work well for several types of professions, including:
- Marketing professionals
- Financial managers
- And more
Like a sole-proprietorship , a business partnership does not shield owners from legal and financial exposure. Partners are liable personally for all debts and paying income tax on profits and losses. The most important advantages of a business partnership are that they are less complicated to form and carry lower taxes than other structures.
Roles And Responsibilities
Legal responsibilities apply to all members of every partnership. In general, they must keep financial records accurate, pay taxes, and provide overall managerial direction, unless they are silent partners. Silent partners share in the profit and loss of a business partnership without exercising operational control.
Depending upon the type of business partnership and industry, partners must share in the following roles and responsibilities:
- Managing employees
- Implementing marketing strategies
- Developing client relationships
- Tracking financial objectives
- Executing other strategic management activities
As you can see, a business partner’s duties are primarily related to everyday managerial activities focused on growth. Several factors determine the scope and depth of each partner’s role, including the type of partnership chosen from a legal and structural standpoint.
Types Of Partnerships
There are a few types of partnerships from a legal and taxation standpoint. The structure you and your partners use will vary by industry, investment strategy, willingness to take on personal liability, relationship strength, individual backgrounds, and location. Consider your options prudently before making a decision.
The four main types of partnerships include:
- General partnership (GP) : A general partnership is where two or more owners carry out the business’ purpose. They share equal responsibility and rights while retaining liability for all obligations and debts. General partnerships allow owners to use a passthrough tax advantage that can result in lower tax rates.
- Limited partnership (LP) : A limited partnership restricts the amount of personal liability involved for investment purposes. While there must be at least one general partner, limited partnerships allow the business to receive operating capital. The limited partner will also receive profits or pay for losses.
- Limited Liability Partnership (LLP) : An LLP retains a general partnership’s tax privileges while offering protection from personal liability to partner members. These safeguards include protection from loss or civil liability resulting from wrongdoings committed by other partners.
- Professional limited liability partnership (PLLP) : A PLLP is an LLP comprised of licensed professionals, such as accountants, lawyers, and medical professionals since some states do not allow them to form as LLPs. The central difference between them is that PLLPs must provide proof of licensure for all members to operate lawfully.
When it comes to structuring your partnership, ensure that you choose an entity type best suited for your situation and business needs. Legal mistakes can become costly endeavors. Speak with a small business lawyer if you have questions or need advice when forming a partnership in your state.
What’s Included In A Business Partnership Agreement
While every business partnership agreement is different, the primary elements are generally the same. However, it should speak to your specific partnership and operation since no two organizations are alike.
Below are common elements included in a business partnership agreement:
- Partnership’s name and location that you will provide on taxes and legal documents
- Required contributions made by each member, such as time, resources, and capital, and at what rate and frequency
- How partners will allocate profits and losses
- Decision-making powers and authorities delegated to each member
- Process for handling business partnership terminations, including the event of death
- Whether you will allow new partners or not and how you will onboard them
- How you will handle and limit civil dispute processes when seeking resolution or remedy from a partner’s wrongdoing
You and your business partners can address many of the details included in a business partnership agreement by drafting an operating agreement first. An operating agreement is generally used in conjunction with the Articles of Incorporation filing to receive Certificates of Incorporation . However, you can apply the identical principle to partnerships for greater understanding by partner members.
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Why Business Partnership Agreements Are Important
A business partnership agreement may be one of the most critical documents that form your business from a legal and financial standpoint. When partners do not know what to anticipate, it can lead to partner disagreements in the future. Try to minimize the potential for disputes at all costs by taking the time to implement a business partnership agreement.
Here are four reasons why business partnership agreements are important:
- Establishes the percentage of ownership allocated to partners, including profitability
- Determines how much control by a percentage each partner holds, including decision-making power
- Expresses the assignment of liability held by individual partner members
- Leaves a set of instructions for remaining members regarding how to handle the deceased partner’s company stake
Theoretically, a business partnership agreement offers guidance to partners regarding their obligations and considerations for meeting them. However, many business owners may work through this process too quickly. The most practical approach is to take your time, if you can, and work with a contract lawyer to provide advice.
How To Write A Business Partnership Agreement
When it comes to writing a business partnership agreement, there is no specific length or way to write it. Since businesses evolve, you can write in provisions that help you address these needs for greater flexibility.
The steps for how to write a business partnership agreement include:
- Draft an initial general operating agreement
- Determine how you will treat the addition of new limited partners
- Determine how you will treat the addition of new full partners
- Create a continuity and succession plan in case a partner leaves
When drafting a business partnership agreement, there are several resources available online to assist you. However, these agreements may not be specific to your situation. For example, using an LLC operating agreement to address a partnership operating agreement’s needs may exclude necessary provisions and guidelines.
Working With A Lawyer To Prepare Your Business Partnership Agreement
Instead of using an online template, work with a small business lawyer to prepare your business partnership agreement. They can provide guidance and advice while ensuring that the contract is proper for your industry and jurisdiction and help you file the necessary legal documents to establish your partnership with the state.
Get started on your business partnership agreement by posting your project to ContractsCounsel for free. Start receiving proposals as soon as today.
Meet some of our Business Partnership Agreement Lawyers
David H. Charlip, the principal of Charlip Law Group, LC, is one of only 101 Board Certified Civil Trial Lawyers in Miami-Dade, with over 38 years of litigation experience. Mr. Charlip is also one of only 136 Florida Civil Law Notaries. He has managed and litigated cases across the country. Mr. Charlip has advised businesses, drafted business formation and purchase and sale documents and litigated business disputes for over 30 years and is very familiar with all aspects of contractual relations.
With over 16 years of experience in the area of estate planning, trademarks, copyrights and contracts, I am currently licensed in Florida and NJ. My expertise includes: counseling clients on intellectual property availability, use and registration; oversee all procedural details of registration and responses with the USPTO/US Copyright Office; negotiate, draft and review corporate contracts and licensing; counsel clients on personal protection, planning and drafting comprehensive estate plans.
Melissa Taylor, the President and founding partner of Maurer Taylor Law, specializes in business contract review and drafting and is a second-generation attorney with private firm, in-house counsel, governmental, entrepreneurial, and solo practitioner experience. Melissa has a strong legal background, a dedication to customer service, is friendly, warm and communicative, and is particularly skilled at explaining complex legal matters in a way that's easy to understand. Melissa personally handles all client matters from start to finish to ensure client satisfaction.
Lawrence A. “Larry” Saichek is an AV rated attorney and a CPA focusing on business and real estate transactions, corporate law and alternative dispute resolution. With a background including five years of public accounting and six years as “in house” counsel to a national real estate investment company, Larry brings a unique perspective to his clients – as attorney, accountant and businessman. Many clients think of Larry as their outside “in house” counsel and a valued member of their team. Larry is also a Florida Supreme Court Certified Mediator and a qualified arbitrator with over 25 years of ADR experience.
Entertainment Attorney with 30+ years of experience, representing all aspects of the TV, Film, Music and Publishing Industries
Aaron focuses his practice on startups and emerging growth companies, providing general counsel services for companies from formation through exit. Aaron frequently advises clients in connection with routine and unique legal, business, and strategic decisions, including corporate, business and technology transactions, angel and venture financings, mergers and acquisitions, protection of intellectual property, and information privacy and data security.
I enjoy helping businesses of all sizes succeed, from start-ups to existing small and medium sized businesses. I regularly advise corporate clients on a variety of legal issues including formation, day to day governance, reviewing and drafting business contracts and other agreements, business acquisitions and sales, as well as commercial and residential real estate issues, including sales, purchases and leases. As an attorney licensed in both Michigan and Florida, I also advise clients on real estate issues affecting businesses and individuals owning real property in either state, whether commercial, residential or vacation/investment property. I also regularly assist nonprofit organizations in obtaining and maintaining tax exempt status, and provide general legal counsel on all matters affecting public charities, private foundations and other nonprofit organizations.