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, there’s no limit to how many partners can form a business partnership in this context.

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 can assist with the questions that stem from the contract itself. 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. Partners who contribute less capital or assets make less 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 many 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 company 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 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 your company’s future in case of a partner’s death or another change to the partnership, regardless of your wishes or intent.
• Disputes: Disputes regarding the company’s operation could arise in the future. With no documentation outlining the partners’ goals, responsibilities, and expectations, the company could suffer.
• Tax implications: Without a clear description of each partner’s contributions for limited or limited liability partnerships, 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 company does.
• Partners’ information: Provide all partners’ names and contact information.
• Capital contributions: Describe the capital (money, assets, tangible items, property, etc.) that each partner provided.
• Ownership interest: Offer each partner’s specific percentage of the company.
• 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 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.

Ten Key Components for a Partnership Contract

The partnership agreement covers the following main points:

Partners:

• This section should clearly outline the process for adding new partners, including specific qualifications, experience, and buy-in amount, if applicable.

Duration of Partnership:

• It is important, but optional, to specify the desired duration of the partnership to eliminate possible future problems. The contract can easily be renewed or extended at a later date.

Capital:

• Financial contributions and partner investments are necessary to keep the company operating. Startup investments, funds to cover emergencies, and company growth are clearly defined in this section. The agreement should clearly state the capital that the partnership should maintain.

Voting Rights:

• Weighted Voting includes a complex system with well-defined rules; the more experienced the partner, the more their vote counts.
• Per Capita Voting is the most common voting rights, with one vote for each partner and the majority wins.

Profits:

• Profit allocation should be clearly defined and is typically decided by voting.

Retirement:

• This section defines retirement options, age, and how funds are issued to retirees. Age is set for mandatory retirement, however, there are exceptions to this rule. It is highly recommended to include a mandatory retirement clause in the agreement.

Disability and Death:

• This section of the agreement should be informative and do what is in the firm’s best interest, but also be compassionate in determining compensation rights.
• Determine temporary and permanent disability distinction, compensation rights, and a cut-off point. Most businesses take a simple approach to this matter and provide either full or partial compensation for a certain amount of time.
• Include sections that define the process and compensation amount for the deceased’s estate. Both the duration of payment and payment amount are clearly stated.

Withdrawal:

• A partnership agreement should include policies and procedures for when a partner leaves the company.
• It is common for a company to offer financial disincentives in order to avoid loss of capital if a partner withdraws on short notice. Financial disincentive benefits:
  • Motivates employees to stay with the firm.
  • Decreases financial risk.
  • Protects clients.

Expulsion:

• A partnership agreement also must include a section to answer questions regarding termination. Expulsion protects a firm in a time of crisis. This section thoroughly covers how the firm will handle an attorney becoming a liability, unproductive, and disbarment.
• If an attorney is disbarred.

Dissolution Protection:

• Protects the rights of the partners and their clients.
• Gives advance notice that the partners are going separate ways.
• The most complicated part of the deed should be included in the agreement.
• As detailed as it can be.
• Refocuses attention on the firm rather than individual careers.
• The responsibilities and duties of the partners should be clearly defined.
• A dissolution provision:
  • Informs clients in advance of the dissolution.
  • Makes the transition easy for clients by helping them find new legal representation.
  • Determines how funds are allocated.
  • Determines how clients are given to individual lawyers.

When to Use a Partnership Agreement

Partnership agreements are for two or more people entering into a for-profit business relationship. The partners often establish a partnership agreement before business or after selecting their company. In some cases, partners create partnership agreements after the fact to ensure everyone has a clear understanding of how the company operates. Still, it’s best to establish and sign the deal 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 can review the state’s rules through your Department of State. Another option is to look for templates to fill in or guide you as you structure your 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 action for establishing an effective partnership agreement. They’ll know what’s necessary to include for your state and industry. They can help ensure 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 can produce 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 the sale’s specifics.
• 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 the partnership at the start of the business ensures all partners know what they’ll need to do if 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 necessary contracts 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. Without clearly defined conditions, disagreements may arise around issues, such as ownership division, roles and responsibilities, and asset division.

Partners should enter into a formal agreement to ensure 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:

• Type 1 . General partnerships (GPs)
• Type 2. Limited liability partnerships (LLPs)
• Type 3 . Limited partnerships (LPs)
• Type 4 . LLC partnership (LLCPs)

Various provisions surround the partnership types. A contract lawyer will ensure you walk away with an amicable agreement for your relationship, industry, company size, and business needs.