Successful partnership businesses rely upon carefully written and comprehensive partnership agreements. Find out why and how to create your own business contract between partners now.
What is a Partnership Agreement
A partnership agreement is a specially written contract that binds two or more parties in a business venture. The parties involved can be individuals or other businesses.
Partnership agreements contain essential details on the nature of a business and allow outside parties and internal stakeholders to understand how the company is managed and financed. These important legal documents normally outline the following:
The legal name of the partnership
Who the owners of the business are
When the business was established
When the business will automatically end (optional)
How much capital has been invested by each party
How profits and losses will be distributed
How decisions are made within the business
How the business will be taxed
What must be done if the partnership is dissolved or a partner leaves the business
Who Needs a Partnership Agreement
Any start-up or pre-established business operating without a written accord can benefit from a partnership agreement. These essential legal contracts help those running the business to properly formalize many of the entity’s most important functions and the duties of individuals who own it.
Partnership agreements also help prevent disagreements over ownership stake percentages and how business decisions should be made. It likewise allows the rights of each owner to be clearly defined and legally documented.
Types of Partnership Agreement
Before you write your own partnership agreement, it is important to consider what kind of business you are going to be setting up. This can affect the choices you make in terms of taxation and rules and regulations you may need to set in place from when your agreement is finalized.
Limited Partnership Agreements
A limited partnership agreement is a type of business structure where one or more partners are offered protection from debt liability. In these kinds of agreements, a general partner is appointed who takes on most of the responsibility for any debts accrued by the company, whilst other partners only place their invested capital at risk.
Limited partnerships should not be confused with limited liability partnerships when partners opt to structure their business as Limited Liability Company or LLC or offer the same limited liability protection to all its members. In this case, there is no single general partner who carries the burden of all the business debts.
General Partnership Agreements
Most partnerships fall into the category of general partnerships. A general partnership agreement is normally used to create a contract between one or more business owners for an entity that has not registered as a corporation or LLC.
Small Business Partnership Agreements
Small business partnership agreements allow owners of smaller entities to ensure that the key information of their business is properly defined and legally binding without registering officially with their state. The partnership may later become an LLC or corporation if the owners choose to make it so.
How to Write a Partnership Agreement
A written partnership agreement must be carefully planned out. As a legal contract that must be adhered to once it has been signed, the details must accurately reflect the desired arrangement between all parties who own the business.
First of all, it is critical that all the key nuances of the business are properly included in the final document. This means explaining how much each owner has invested, how voting rights are distributed, how the business will be taxed etc.
Additionally, it is very important to explain all the company details in plain, easy to understand terms. Overcomplexity could lead to difficulties in interpreting the contract and ambiguity might lead to misunderstandings.
Our partnership agreement form planner can help take some of the difficulty out of this process. It will guide you through each step of writing your contract by instructing you on what information you might need to include and what details must be provided.
What Should Be Included in a Partnership Agreement
Partnership agreements are normally written so that the interests of all parties can be properly protected. This allows partners to clearly define key information such as:
Who owns and runs the business: The partnership agreement needs to detail the names and contact information of the main owners.
The main details of the business: The document must explain information on the business such as its registered name and address. It should also tell the reader what the company does; when the partnership was established, and if it will dissolve on a set date in the future.
Ownership rights and percentages: It is very important that the partnership agreement gives an explanation of how much money has been invested by each party and how business ownership is to be shared.
A description of the partnership’s goals: A successful company sets clear goals that align with the aims of the owners. In the case of a partnership agreement, this means outlining how much revenue you expect to make, how many employees you wish to hire, or what outcomes you wish to achieve, etc.
Profit and debt distribution: The partnership agreement should give an explanation of how profits and losses will be shared by the partners. This is normally done on a percentile scale and often follows how much of the company each party owns.
Tax status: The agreement should outline who is responsible for managing the company’s taxes and denoting a fiscal year-end date amongst other things.
Adding or removing partners: It is important to plan ahead in case a partner leaves or a new one joins. Therefore the partnership agreement needs to explain the rules of how someone can be added or removed from the business officially and fairly.
Voting rights for partners: Your partnership agreement should make it clear how voting rights will be shared between all the partners and establish what proportion of a vote is needed to proceed with an action.
Partnership Agreement FAQs
Being fully sure of all the details and discrepancies that might come up during the creation of your contract is key. If you still need some extra guidance on the ins and outs of partnership agreements, read on to find the answers in our FAQs.
Why a Partnership Agreement Needs to Be Written?
Partnership agreements add security and clarity to business entities. Even if company owners are friends or even spouses, it is essential to have some details of how money has been invested or how decisions should be made legally bound in writing.
It is of course possible to run a partnership without any kind of official legal documentation beyond an EIN (Employer Identification Number). However, these kinds of companies are open to potential disagreements and misinterpretations of how profits and debt should be split. To ensure everyone is on the same page it’s much safer to formalize everything in a signed partnership agreement.
How to Negotiate a Partnership Agreement?
Before writing and signing a partnership agreement, it is important that all the partners and parties involved fully understand what they are agreeing to. Therefore, all the owners need to get together first and negotiate how the business will be organized.
There’s no such thing as a one-size-fits-all partnership. How you run and structure your company is completely up to you and your partner(s). Before you meet you should first define fundamentals such as how much each party will invest in the business, what they will do to help its day-to-day operations, and how they will interact with decision-making, etc.
It’s also important to define what business goals you all want to pursue. These should be aligned or you may run into disagreements further down the line. Once this and other key decisions are agreed upon, you can start to draw up the partnership agreement.
Can I Use a Partnership for My LLC?
It is possible for LLCs to function in much the same way as a general partnership would. There is a little more paperwork involved in setting up an LLC but it is an option that many business owners choose as it offers partners limited liability and much the same operating structure as they would find with a normal partnership.
The other benefit of setting your partnership up as an LLC is you and your partners can elect to be taxed as a partnership if you fit the right criteria. This means that you and your partner’s income are taxed by the IRS but the LLC itself is not.