The legal term “partnership” describes two individual commercial entities forming an alliance with each other. This alliance could be a contractual and exclusive bond in which both partners agree to not ally themselves with a third partner. A partnership is a very specific legal relationship, which is formed by the agreement to carry on a business as co-owners of that business.
The most common type of business partnership is a limited partnership, which enables limited partners to achieve legal protection against any individual liability for the debts, losses, and violations related to the partnership as a whole.
A partnership agreement is a written agreement between the business partners. The partnership agreement explains the relationship each partner has with the business, and it details the rights and obligations each individual partner has to the business. Additionally, the partnership agreement clarifies the nature of the business, specifies the capital contributed by each partner, and outlines each partner’s rights and responsibilities.
Partnership agreements are important because the agreement legally allows partners to structure their relationship in a way that best suits the business. Further, the agreement sets out the provisions of running the business partnership. Having written proof of these agreements could help solve any future issues, should they arise.
Additionally, the agreement clearly states individuals who possess the authority to make business decisions on behalf of the partnership business. A good partnership agreement will also detail how the business can be dissolved, how the partnership may be transferred, and protections afforded to the surviving partner in the event of the death of the other partner.
Because of how important a successful agreement is to the health of the partnership, it is crucial to create the agreement ahead of time and agree to the terms. Doing so will ensure that there is an organized structure to the partnership that informs each partner of their responsibilities, as well as how future disputes between the partners may be resolved.
The following list includes some of the basic elements that should be included in any partnership agreement:
- Amount of Ownership: The amount of the partnership owned by each partner should be determined and noted in the agreement. Determine how much each partner is contributing to the company, both financial and property assets, and how much each partner will receive in terms of profits. Once this has all been determined, it should be committed to the partnership agreement;
- A System for Making Decisions: Any policy and procedure should be included in the partnership agreement. The partners should agree upon a way in which major decisions are made in the partnership, whether unanimous vote or some other method;
- Authority for Different Aspects of the Business: Not every partner needs authority in every aspect of the business, as this can complicate situations and impede progress. The agreement should specify who has authority where, and set out a system of management. It should be explained who is in charge of which specific aspects of the company such as accounting, customer service, etc. Without an agreement that details each partner’s authority, any partner would have the permission to bind the partnership business to any contract, debt, or agreement;
- A Buyer-Seller Agreement: The business agreement should contain a plan for what happens when one of the partners leaves their position, whether it be due to death, termination, resignation, or some other potentially unforeseen circumstances. Additionally, the agreement should specify how that former partner’s portion of the business will be divided amongst the remaining partner(s);
- Adding Partners Procedure: As previously mentioned, some partnerships are only between two partners who agree not to ally themselves with a third partner. However, this is not always the case. A partnership agreement should include a procedure for how new partners will be added to the business. It should also specify who is allowed to be part of that decision, as well as how much say in business matters they will have;
- Dispute Resolution Procedure: A procedure for resolving business disputes between the partners should be included in the partnership agreement. This can help future issues move along smoothly; and
- Salary, Distribution, Debt, and Obligations Procedure: The agreement should detail how much each partner has contributed to the business, and how much return investment or salary each partner will receive from the business. Additionally, the obligations of each partner should be detailed, for the debt incurred by the business. This should halt any dispute or confusion when ending the partnership.
Contracts such as a partnership agreement may be drafted by anyone, but an attorney is often necessary in order to create a reliable and secure contract, especially when the contract is complex. A skilled and knowledgeable business attorney can assist you in identifying your needs and creating a sound and legally enforceable partnership agreement.
If you find yourself in a conflict regarding a partnership agreement, a business attorney can also help you determine your best course of action in order to protect yourself and your assets, as well as represent you in court, if necessary.