You can compare business partnerships with that of personal partnerships where both parties involved need to define understandings which are clearly communicated. For businesses, this understanding should come in the form of a written document known as a partnership agreement template.
Partnership Agreement Templates
What is a partnership agreement?
A very important question to consider about a partnership is “what happens if…” Either party can ask this question if something should happen to the other, if there is a dispute among partners or if there are any changes in the partnership. All the parties involved in the business partnership agreement concerned should know the answer to the question.
A partnership agreement template is a written contract between two or more partners involved in a legal partnership where their relationship’s terms and conditions are clearly defined. These terms and conditions may include:
- Ownership percentages and the distribution of losses and profits.
- Defining management duties and powers of either partner.
- Length or term of the partnership.
- Ways how the partnership may get terminated
- Ways how partners may buy their share of the partnership.
Logically, you should prepare a partnership contract at the onset of the partnership. It’s highly recommended to hire the services of a lawyer to help craft the partnership agreement form. This ensures that all those “what if” conditions get included to avoid any problems in the future.
Why do you need a partnership agreement?
Talking with a lawyer helps you realize the significance of a partnership agreement template. The document clarifies issues about the partnership, especially in terms of possible situations that might lead to confusion, change or disagreement.
Listed below are some of the reasons why you need a general partnership agreement from the start of the business venture:
- To clearly establish the responsibilities and roles of each partner
A business partnership agreement describes how you will make decisions. The agreement names a managing partner, lists the responsibilities of individual partners and describes how responsibilities and roles can change during the partnership.
- To avoid taxes
The document specifies the partnership’s tax status and how the partnership will distribute profits based on accounting and tax norms considered acceptable.
- To avoid any legal liability issues
The partnership contract specifies the liabilities of individual partners as well as the liability of all the partners in case there’s a liability issue.
- To address any changes in the partnership
For instance, some partners may decide to leave, become incompetent or sick, get divorced or even die. Usually, you would deal with such issues through buying-out agreements.
- To override the state laws
Some of the states have specific language requirements in partnership agreement forms. In case you decide not to have an official agreement, the recourse will be to have yourself abide by the default laws of the state.
- To facilitate any disputes
It’s always recommended to have language in the general partnership agreement which defines how you will settle disputes. There are certain questions you must answer to ensure the efficiency of your document. Some examples of these questions are:
Should the issue go under arbitration?
What responsibilities will the partners have when there is a dispute?
Who will pay for what?
- Other reasons include:
To describe the conditions each partner needs to follow when new partners would join the partnership.
To deal with issues among partners like conflicts of interests, non-compete agreements, and more.
Important things to know about partnership agreement
A partnership agreement template made between a minimum of two legal entities is a legally binding contract. The document defines the responsibilities and rights of all partners who form the enterprise. Here are some important things to know about a business partnership agreement:
There are several types of partnership contracts. The most common of these is the one between individual people. There are also agreements made up of other kinds of legal entities. For instance, limited liability companies or corporations can merge to create a partnership too.
Partnership agreement forms usually include:
The full names of each partner that forms the business.
The purpose why they’re forming the partnership along with the main place of business.
The amount each partner plans to invest in the partnership.
The rules regarding profit distribution between partners.
Perhaps the most common misconception about partnerships is that all partners own equal shares. In reality, a general partnership agreement may divide the business’s ownership interest based on the manner agreed upon by the partners.
Another common misconception is that all of the partners need to get involved in all the affairs of the partnership. In reality, partners can indeed involve themselves in the business operations but the agreement may allow a partner to only be an investor.
- Expert Assistance
The management and law of partnerships represent complex legal issues. There may be a need to retain legal representation for the best interest of the involved parties. The ABA provides resources specifically designed to help partnerships which have the intention of establishing such businesses.
General Partnership Agreements
Creating a partnership agreement template
Always allow time to create a partnership agreement template when you want to start a small business partnership. Outlining the details of such partnership spares you from future disagreements and worse, lawsuits. The agreement can be as general or as specific, depending upon your discretion.
However, it’s always better to have a detailed agreement to prevent any future disputes. Here are some tips to guide you when creating this document:
Preparing to make the document
- First, read the Uniform Partnership Act
If you have no partnership agreement, State Laws provide for you default rules to govern your partnership. Making your own agreement replaces these default rules. You can have one tailor-made for your own business.
- Meet with your partners
A great thing about making your own agreement is that it encourages partners to think upfront of the issues relevant to the partnership. You can do this when you meet with your partners.
- Assign drafting to a single person
For purposes of convenience, just one person should write the preliminary draft of the agreement. Upon completion, you can distribute the draft for comments or revisions.
- Consult with a lawyer
Seek the assistance of an experienced business lawyer who can help identify areas of the agreement you need to address. Present the draft you made to the lawyer and run through the general outlines of the parts of the business partnership agreement.
Establish your partnership
- Give the document a title
The beginning of the document should readily identify what the document is all about.
- List all partners and their addresses
Next on the agreement is the names of each partner and their respective addresses. They should state their willingness to be part of the agreement.
- Identify the type of your business
Place this information underneath the names of the partners.
- State your place of business
This is a relevant piece of information. When doing so, use formal language.
- Identify the agreement’s terms of existence
In this section, identifying when the partnership started and when it’s scheduled to come to an end. Most of the time though, such an agreement usually doesn’t have a date of expiration.
Assign the ownership duties, powers, and interests
- Enumerate each partner’s capital contributions
It’s more of a norm that partners give unequal resources when starting a partnership. Make a list of the partners with their corresponding contributed amounts and type whether they made their contributions in cash or property.
- Identify the partnership property
Any property that gets contributed to the partnership will become the partnership’s property. In addition, any properties the partnership purchases belong to the partnership to. Specify these specified in your agreement.
- Decide how you plan to allocate any losses and profits
In general, you can base this allocation on the contribution percentages at the beginning of the partnership. Using other percentage values depends upon the discretion of the partners.
For instance, a partner might contribute a larger amount of cash at the startup but doesn’t do work. In such a case, partners might agree to give smaller portions of profits to this particular partner.
- Establish how the partnership makes business decisions
When the business is already in operation, there could be many decisions that you need to make. The agreement should specify who can make such decisions.
- Clarify who has the authority to form contracts
In the absence of this provision in the contract, any partner may bind the whole partnership to any other contract or agreement. To avoid such predicament, the agreement should clarify who has the authority to commit the partnership to other obligations or contracts.
- Limit any outside employment
The agreement can limit any work that each of the partners can perform outside of the partnership. Specify that partners cannot engage in other businesses in competition with the partnership.
Finalize your agreement
- Select the law that governs the agreement.
- State the completion of the agreement.
- Remember to include space for signatures.
- Schedule a meeting to sign the final agreement.