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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 refer 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 protection from the malpractice or negligence claims that may arise from their other partners. The distribution of shares in an LLP will depend on the partnership agreement.
Partnership agreements help establish clear boundaries and expectations regardless of whether your partnership is general, limited, or limited liability.
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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.
Potential Consequences
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. The default provisions under state law may not always align with the wishes of the partners when it comes to business operations.
- 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. It is worth noting that partnerships are pass-through entities, meaning the business itself is not subject to taxation. The profits and losses pass through to the individual partners who then report them on their personal tax return.
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.
Here is an article on how to write a 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.
Related Documents
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.
The Importance of Having a Partnership Agreement
Partnership agreements can resolve potential conflicts between partners. Disagreements may arise around issues, such as ownership division, roles and responsibilities, and asset division, without clearly defined terms and conditions.
Partners should enter into a formal agreement to ensure that both parties form and manage it correctly while avoiding partner conflicts. Disputes can result in expensive legal proceedings and unnecessary financial losses for all parties when contracts don’t address issues adequately.
Types of Partnerships
Partnerships are businesses with two or more business owners. Each partner contributes to the businesses’ financial or operational aspects in exchange for profit & loss (P&L). There are different types of partnerships to address the unique needs of your specific business situation.
There are four partnership types to consider:
- General partnerships (GPs)
- Limited liability partnerships (LLPs)
- Limited partnerships (LPs)
- Limited liability limited partnership (LLLPs)
Various provisions surround the partnership types. A contract lawyer will ensure that you walk away with an amicable agreement for your relationship, industry, company size, and business needs.
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As a licensed AL lawyer with over 7 years of experience in the legal field, I have spent more than 15 years working in the business and finance sector. I am deeply passionate about immigration, contracts, & my expertise spans a wide range of projects. From handling ICOs & IPOs to navigating VCs, SaaS, OnlyFans, Wholesaler & Manufacturing Agreements, Prenups, Movie Finance, M & As, Visas, Green Cards and more. I have a comprehensive understanding of various contractual needs. Whatever your contract requirements may be, feel free to reach out to me—I can craft or work on any contract with precision and expertise.
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G'day, my name is Michele! I work with startups, entrepreneurs and small/medium-sized businesses across the country in a wide array of industries. I help them with all of their ongoing, daily legal needs. This includes entity formation, M&A, contract drafting and review, employment, asset sale & acquisition, and business sales or shareholder exits. I'm half-Australian, half-Italian, and I've lived the last 20+ years of my life in America. I've lived all over the USA, completing high school in the deep south, graduating cum laude from Washington University in St. Louis, and then cum laude from Georgetown University Law Center. After law school I worked for the Los Angeles office of Latham & Watkins, LLP. After four intense and rewarding years there, I left to become General Counsel and VP of an incredible, industry-changing start-up called Urban Mining Company (UMC) that manufactures rare earth permanent magnets. I now work for Phocus Law where I help run our practice focused on entrepreneurs, startups, and SMEs. I love what I do, and I'd love to be of help! My focus is on providing stress-free, enjoyable, and high-quality legal service to all of my clients. Being a good lawyer isn't enough: the client experience should also be great. But work isn't everything, and I love my free time. I've been an avid traveler since my parents put me on a plane to Italy at 9-months old. I'm also a music nut, and am still looking for that perfect client that will engage me to explain why Dark Side Of The Moon is the greatest album of all time. Having grown up in a remote, and gorgeous corner of Australia, I feel a strong connection to nature, and love being in the elements.
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Partnership Agreement
New York
How can I make a legal contract signature with no experience?
I'm currently making a new crypto coin with my friend. I want to make an official personal contract signature so that my friend doesn't resign or remove me from his team even though I am the founder. So, the point is that if my friend wanted to do the same, he couldn't because he already had a contract signed.
Jane C.
There are clauses that you can put in contracts to incentivize key people to stay in the company.
Dispute
Partnership Agreement
New York
litigation over partnership
Partner is diverting monies for his own use
Donya G.
Hello, I am sorry to hear that. Do you have a contract for the partnership? What does it say about resolving disputes? Do you have evidence of the misuse of funds? Can you cut off the funds so that they can no longer misuse the funds? For your safety, please do not confront the partner. All your remedies will depend on your agreement and the state of your business incorporation or where you do business. I see you are in New York. Is that where your business is incorporated? I would love the opportunity to work with you to resolve this. I am an New York contracts attorney who works with clients on contract disputes. I am an Arbitrator and have been a judicial clerk to a Civil Court Judge so I have extensive experience with disputes. When can we get on a call to discuss? I am available later today, Friday 18th or anytime next week. You can connect with me on Contracts Counsel. Looking forward to hearing from and working with you. Sincerely Donya Gordon
Business
Partnership Agreement
California
How to dissolve a partnership agreement?
I want to get out of a partnership we have with another business where we are sharing profits from products we're selling. It isn't working out and the other party isn't living up to their obligations based on what we initially discuss.
Michael M.
Usually, partnership agreements have a termination provision which addresses when and how the partnership can be terminated. Typically, termination occurs upon the vote of the partners or upon the occurrence of an event or number of years.
Partnership
Partnership Agreement
Texas
What is a partnership agreement?
I am starting a business with a partner and we are looking to create a partnership agreement. We want to make sure that all of our rights and responsibilities are clearly outlined in the agreement in order to protect both of us. We want to be sure that we have a clear understanding of our obligations to each other and the business. We also want to make sure that our agreement is legally binding.
Darryl S.
A partnership agreement is a legally binding contract between two or more partners that clearly outlines the terms of their business relationship. It details each partner's rights, responsibilities, share of ownership and profits, as well as what happens when a partner leaves or dies. Having a clear partnership agreement is crucial for avoiding future disputes or uncertainties that could undermine the partnership.
Corporate
Partnership Agreement
Tennessee
What is a limited partnership agreement?
Being asked to sign one and not sure what it is. I'm trying to create a partnership with a few of my colleagues and I'm concerned about the word 'limited'.
Michael S.
We really need to know more about the business and how everyone envisions ownership in order to answer the question. In general (and this is very general - I am a PA lawyer, not Tennessee), a limited partnership is an entity through which a business or property is owned. In a limited partnership, you need to have a general partner (either one more individuals or entities) who essentially manage the entity, and also have liability for all liabilities of the general partnership. The limited partners invest in the entity, but have no liability for the entity's obligations.
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Have a current partnership agreement, but don't know if how to enforce it. And if it is enforcable at this point, and to what point
Location: Ohio
Turnaround: A week
Service: Drafting
Doc Type: Partnership Agreement
Number of Bids: 3
Bid Range: $400 - $600
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Partnership Agreement
Location: California
Turnaround: Less than a week
Service: Contract Review
Doc Type: Partnership Agreement
Page Count: 65
Number of Bids: 4
Bid Range: $600 - $1,350
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