Having a business partnership agreement in place will provide a documented structure between the business relationship and the partners. While a verbal or oral agreement is legal in most states, having a written agreement will better protect you in the event of major conflicts arise down the road. While states don’t require partnership agreements, having a clearly written agreement and clearly outlining your relationship will benefit you in the long run by taking the guesswork out of the operations of the business. By agreeing upon the terms and executing an agreement, you and your partner(s) are also able to make decisions about the governance of the company outside of court.
In the absence of a partnership agreement, the default partnership laws of your state will control, and you will each have less say in how your business operates. Without an agreement in place, the default rules of general partnership mean that each partner will be equally liable for the profits and losses. An agreement can also provide a plan for how certain business decisions, internal problems, and disagreements will be managed. If there are no defined methods of operation, disputes can quickly derail the company. The best time to enter into a partnership agreement is before the company forms.
What is the Difference Between an Operating Agreement and a Partnership Agreement?
Partnership agreements are used for partnerships, whereas operating agreements are used for LLCs. Both an LLC operating agreement
and a partnership agreement are legal documents that outline the internal governance of a business. Like a Limited Liability Company operating agreement, a partnership agreement can be tailored to meet the needs and circumstances of your company.
The terms in the agreement outline how you and your partner(s) intend to operate the partnership. This not only includes how the profits and losses are shared, but also the rights, responsibilities, duties, and obligations of each partner.
An operating agreement principally serves the same purpose for an LLC by detailing the terms of how the members and managers will operate the company. An operating agreement usually includes details about who owns the company, the number of employees, how the company will be operated, and how internal disputes are to be handled.
How Long Does a Partnership Agreement Last?
The partnership agreement lasts as long as the partnership itself. While the agreement should stipulate the duration of the partnership, they usually last indefinitely until a partner dies or withdraws.
What Should a General Partnership Agreement Include?
There are are several important provisions that should be included in a written partnership agreement. Some of the most common and recommended ones are described below.
Name of the Partnership
The name of the partnership should most definitely be included in even the most simple partnership agreements. Most partnerships will use a fictitious business name, so be sure to use the name exactly as it is registered as overlooking simple details such as this can complicate matters should there be a dispute between partners.
Partner’s Names
The first and last names of the partners and current address should be included. It’s essential to keep this section up-to-date as the partners can change over time.
Business Structure & Partner’s Contributions
Typically a business partnership agreement will outline the ownership interest and rights of each partner. Partners can agree on the value of each partner’s capital contribution, not only in cash but also contributions in the form of equipment, services, and property. These contributions are usually the basis of each partner’s percentage interest but are not required to be.
Partner’s Responsibilities
Clearly defined roles and responsibilities of the partners should be included. Additionally, since each partner can individually commit the company to any debts or contracts, it may be important to indicate any limitations when making major decisions. An agreement can include provisions that expressly limit or divide this authority. Without this, either partner has equal authority to enter into a contract on behalf of the company and potentially put it and the other partners at risk.
Allocation of Profits
Partners can agree upon the individual partner’s share of business profits and losses, which is usually calculated based on their ownership rights. The agreement can also state how much of the company’s profits can be withdrawn from the business at certain points in time or earnings milestones.
Duration of the Partnership
Partnerships can last for a certain amount of time or an agreement can stipulate that the duration is perpetual. Even if there is not a designated event or date when the partnership will dissolve, the agreement should specify a duration of some sort.
Procedures for Business Decision Making & Dispute Resolution
Many conflicts can arise in business, mainly when ownership is divided among partners. For this reason, it is important to have provisions setting forth your company’s procedures for decision-making and resolving disputes. These procedures can include voting requirements for big decisions or a mediation clause.
Certain matters, such as financial or other important decisions, can be required to have a unanimous vote by all the business partners.
Withdrawal, Dissolution, or Adding a Partner
It can also be stipulated that the partnership will dissolve upon the withdrawal or death of a partner. The provisions regarding withdrawal can include a buy and/or sell requirement. Additionally, there should be a plan for the sale of business property upon dissolution.
The agreement should describe the procedure for adding a new partner, including the necessary voting procedure for authorizing this addition, as well as any capital contributions required for the new partner to buy in.
Do You Need a Lawyer For a Partnership Agreement?
The provisions in a partnership contract can be confusing. Since the language is binding on all parties, you might consider enlisting the help of a qualified attorney to draft and explain the terms to you. An attorney can evaluate the specifics of your business plan and help you determine the appropriate legal advice to protect you and your company. Even if you opt to handle the formation paperwork yourself, investing in the legal fees to have a solid agreement drafted can be well worth it.
If you decide to go it on your own, you may want to look at your state’s Uniform Partnership Act (example search – “Colorado Uniform Partnership Act”) to review partnership legalities in your state.
