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What Is a Partnership Agreement?
A partnership agreement is an internal business contract that outlines specific business practices for the partners of a company. This document helps establish rules for how the partners will manage business responsibilities, ownership and investments, profits and losses, and company management. While the word partners often refers to two people, in this context there's no limit to how many partners can form a business partnership.
Partnership agreements go by different names depending on the state and industry in which they're formed. You might know partnership agreements as:
- Articles of Partnership
- Business Partnership Agreement
- Creation of Partnership Agreement
- Formation of Partnership Agreement
- General Partnership Agreement
- Partnership Contract
Partnership agreements help answer, "What happens if..." questions before they come up in practice to ensure the company runs smoothly. The three main types of partnership agreements are:
- General: In a general partnership, all partners equally share liabilities, profits, and assets.
- Limited: Limited partnerships protect partners who do not contribute capital equally. This way, the partner or partners who contribute the most money or assets earn the most profit and take on the most liability, while partners who contribute less in capital or assets earn less in profits and carry less liability.
- Limited liability: Limited liability partnerships function much the same as general partnerships, but give the partners limited personal liability while maintaining equal shares of the company and its profits.
Partnership agreements help establish clear boundaries and expectations regardless of whether your partnership is general, limited, or limited liability.
Benefits of a Partnership Agreement
Partnership agreements offer a host of benefits to those business owners who create one. A few of the most substantial benefits include:
- Business outline: The agreement delineates all the elements of the business and how the partners are to manage each, which helps reduce confusion once the business is running.
- Clear responsibilities: The partnership agreement clearly establishes personal responsibilities for each partner in terms of capital, profits, losses, and liabilities in addition to business management and oversight.
- Form of mediation: The primary benefit of a partnership agreement is in its ability to forestall future arguments. Since all expectations and responsibilities are outlined, all partners should know what they need to do to fulfill their duties.
When you start your business, the division of labor and resources between partners might seem obvious, so you might not think it's worthwhile to create a partnership agreement. Unfortunately, your business might suffer negative consequences in the future without one.
- State law: Every state has different laws governing partnerships. If you don't create an agreement, state law will automatically govern the future of your company in the case of a partner's death or another change to the partnership, regardless of your wishes or intent.
- Disputes: Disputes regarding the operation of the company could arise in the future. With no documentation outlining the goals, responsibilities, and expectations of the partners, the company could suffer.
- Tax implications: For those limited or limited liability partnerships, without a clear description of each partner's contributions, the state could assume each partner owns the same share of the company and tax them accordingly.
Elements of a Partnership Agreement
Most partnership agreements share some common elements . When you're drafting yours, ensure you include the following categories:
- Name: Include the name of your business.
- Purpose: Explain what your business does.
- Partners' information: Provide all partner's names and contact information.
- Capital contributions: Describe the capital (money, assets, tangible items, property, etc.) that each partner provided.
- Ownership interest: Offer the specific percentage of the company that each partner owns.
- Profit and loss distribution: Explain the percentage of profit and loss assigned to each partner and how the company will distribute revenue.
- Management and voting: Outline how the partners will manage the company by delineating individual responsibilities in addition to explaining decision-making and voting between partners.
- Adding or removing partners: Create specific guidelines for adding new partners, removing partners who want to leave, and removing partners who don't want to leave.
- Dissolution: Describe how you'll liquidate the business and share out any profits should the company dissolve.
- Partnership tax elections: Assign a partnership representative to manage all tax communications.
- Death or disability: Provide clear instructions for how each partner's ownership in the company should be liquidated or redistributed in the unlikely event of their death or disability.
When to Use a Partnership Agreement
Partnership agreements are for two or more people entering into a for-profit business relationship to use. Almost always, the partners establish a partnership agreement before going into business or just after establishing their company. In some cases, partners create partnership agreements after the fact to ensure everyone has a clear understanding of how the company operates, but it's best to have the agreement established and signed before opening your business's doors.
How to Write a Partnership Agreement
You have several options when establishing a partnership agreement. Since every state has its own laws governing formal business partnerships, you could start by reviewing the state's rules through your Department of State. Another option is to look for templates you can use to simply fill in or guide you as you structure your own partnership agreement. Finally, you can consult an attorney who specializes in contract law. Contract lawyers can help you create a custom partnership agreement.
Using an Attorney
Contract lawyers are your best course of action for establishing an effective partnership agreement. They'll know what's necessary to include for your state and industry and can help ensure that you've thought of and described every possible scenario and element for your business for the smoothest management experience.
Additionally, the use of an attorney ensures a mediating third party who can help ease any initial disagreements and maintain fairness within the contract. Contract attorneys are well-versed in writing legal documents, so they'll use specific language that will offer clear guidance later if needed rather than vague statements that might have seemed sufficient when originally written but are unclear years later.
Besides your partnership agreement, you might benefit from producing several other contractual business documents to ensure the smooth management of your company.
- Business Sale Agreement: If you're purchasing your business from someone else, this document outlines all the specifics of the sale.
- Notice of Withdrawal from Partnership: While this document might not get used or won't be used for some time, drafting a notice of withdrawal from partnership at the start of the business ensures all partners know what they'll need to do should they decide to exit the partnership.
- Assignment of Partnership Interest: This document outlines how to transfer partnership interest between business partners.
- Partnership Amending Agreement: Use this document to make any changes to the original partnership agreement.
- Joint Venture Agreement: This document outlines the specifics of how two or more people combined their assets or capital for a joint business venture.
- Business Plan: Use this internal document as a comprehensive guide on how the business will run, the specific departments, mission, goals, and more.
Partnership agreements are a necessary contract for any professional partnership. They help protect all partners financially and can ease any potential tensions throughout the life of the business. Consult with a lawyer to ensure your partnership agreement fully covers the elements of a partnership.
Meet some of our Partnership Agreement Lawyers
I have been practicing law for 35 years. In addition to my law degree, I hold an MBA. I've created six companies, currently act as outside counsel to another 12, and have been an advisor to more than 500 startups and entrepreneurs.
I am a licensed and active Business Attorney, with over 20 years of diverse legal and business experience. I specialize in contract review, drafting, negotiations, ecommerce business transactions, breach of contract issues, contract dispute and arbitration. I am licensed to practice in New York and Connecticut. I am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. I negotiate, draft and review a wide array of commercial contracts; provide business strategy and employment advice and assist in the sale of businesses entities. I work extensively with various kinds of contracts. In reviewing agreements, I conduct risk analysis of contract and interpret the terms and conditions so that clients understand exactly what their obligations are under the agreement and are protected as much as the law requires. I am detailed and thorough in my review and drafting of agreements. Additionally, I advise clients on how to limit their liability and lower their contractual risk. I specialize in breach of contract issues and arbitration. I have been a Hearing Officer, presiding over cases and rendering written decisions; a Civil Court Arbitrator presiding over cases in contract law, commercial law, etc., a Judicial Clerk in Civil Court; a Vice President at an Investment Bank and an Attorney at top AML law firms.
Carlos Colón-Machargo is a fully bilingual (English-Spanish) attorney-at-law and Certified Public Accountant (CPA) with over twenty years of experience. His major areas of practice include labor and employment law; business law; corporate, contract and tax law; and estate planning. He is currently admitted to practice law in Georgia, Florida, the District of Columbia and Puerto Rico and currently licensed as a CPA in Florida. He received a Master of Laws from the Georgetown University Law Center in 1997, where he concentrated in Labor and Employment Law (LL. M. in Labor and Employment Law) and a Juris Doctor, cum laude, from the Inter American University.
Graduate of Georgetown Law (J.D. and LL.M in Taxation) Injury Claims Adjuster before law school for top insurer Eight plus years of legal experience Past roles: Associate at premier boutique law firm in the DC metro area Policy Associate at a large academic and research institution Solo Practice Areas of Expertise: Contracts Business Formation Trusts and Estates Demand Letters Entertainment Transactions
As a business law attorney serving Coral Springs, Parkland, and Broward County, FL, Matthew has been recognized as “AV” rated, which is the highest rating an attorney can achieve through Martindale’s Peer Review system. Year after year Matthew is listed in the “Legal Leaders” publication as a top-rated attorney in South Florida in the areas of litigation, commercial litigation, and real estate. Matthew is also a graduate and instructor of the Kaufman Foundation’s FastTrac NewVenture Program, presented by the Broward County Office of Economic and Small Business Development.
John Benemerito is the Founder and Managing Partner of Benemerito Attorneys at Law. Admitted to practice in New York and New Jersey, John represents small business owners and startups in the areas of Business and Securities Law. John received his Bachelors Degree at John Jay College of Criminal Justice where he majored in Criminal Justice. Afterwards, he attended New York Law School where he focused his studies on Corporate and Securities Law. John comes from a family of entrepreneurs. From as far back as he can remember he was always involved in his family’s numerous businesses. At the age of fifteen, John entered into a new business venture with his father and managed to grow and maintain that business through high school, college and law school.John is currently a co founder in over five different businesses. After law school, John decided that he wanted to help people like himself. He opened his own law practice and began working primarily with small business owners until he was introduced into the startup world. Ever since that time, John has worked with hundreds of startups and thousands of entrepreneurs from all different backgrounds in helping them achieve their goals. Having been an entrepreneur his entire life, John understands what it takes to create and maintain a successful business. He enjoys sitting down and working with his clients in figuring out each of their unique challenges.
California-based small business attorney handling matters related to securities, mergers & acquisitions, corporate governance, and other business transactions.