A partnership is similar to a sole proprietorship, with each partner owning a portion of the company's assets and liabilities.
Unexpectedly many companies with two or more partners operate without a partnership agreement. When people are so thrilled about starting their firm, many frequently gloss over this very crucial document or move it to the bottom of their never-ending to-do list. Then, one day, an unexpected dispute emerges between the partners, and they desperately need to know what their rights are in that circumstance.
Although it is not necessary, I highly advise partnerships to have a partnership agreement in place to spell out each partner's obligations and ownership in the company. The more precise and comprehensive the agreement, the less room there is for discussion or argument when parties aren't quite on the same page.
The purpose of this article is to highlight the core aspects of a partnership agreement and what should your partnership agreement contain. Here’s a list of some important points you should surely consider while addressing your partnership agreement!
What exactly is a partnership agreement?
Although it is not advisable, you can nonetheless legally form a standard partnership agreement by shaking hands. A business partnership agreement is an agreement between two or more business partners that outlines the goals and legal structure of the company. It includes the following details:
- Individual partners’ duties
- Capital investment
- Partnership’s Assets
- Each partner’s share of ownership
- Norms for making a decision
If you've signed a partnership agreement with someone, you are obligated to abide by its conditions until the partnership is formally terminated.
These agreements are put in place to settle conflicts, designate roles, and clarify how profits and losses are distributed. This legal document offers crucial instructions for business operations.
By formalizing your joint venture with a written partnership agreement, you can avoid any personal conflicts by having an agreement between you and your partner(s) on how to handle particular circumstances in advance. It will facilitate the smooth operation of your partnership on a daily basis and stop issues from developing into major issues.
Why is the Partnership Agreement Important?
Potential disagreements between partners can be settled via a partnership agreement. Without clearly defined terms and conditions, disagreements may occur over matters like ownership division, duties and obligations, and asset partition.
To ensure that the relationship is formed and managed properly while preventing partner conflicts, partners should engage in a legal agreement. When contracts don't appropriately address concerns, disputes can lead to pricey legal actions and unwarranted financial losses for all parties.
Benefits of a Partnership Agreement
For business owners that establish partnerships, there are numerous advantages. Below are some of the most noteworthy advantages:
The agreement outlines each aspect of the firm and specifies how the partners are to supervise it, which helps prevent confusion once the enterprise is up and running.
The partnership agreement specifies each partner's personal obligations with regard to capital, profits, loss, and liabilities, as well as management and control of the business.
Type of mediation:
The main advantage of a partnership agreement is that it can prevent future disputes. Both parties should be aware of their obligations given that all expectations and responsibilities have been laid forth.
Essentials of a Partnership Agreement
Most partnership agreements have some elements in common. When you prepare yours, make sure you include the following categories:
- Name: Include the business name.
- Purpose: Describe the work that your company does.
- Partners' information: Provide the names and contact information of all partners.
- Capital Investments: Describe the capital (cash, assets, tangible goods, real estate, etc.) provided by each partner.
- Ownership interest: Specify what portion of the business each partner owns.
- Profit and loss distribution: Describe how the company will distribute revenue and the percentage of profit and loss allotted to each partner.
- Management and voting: Describe how the partners will operate the company, outlining each partner's role as well as how decisions and votes will be made between partners.
- Partner addition or deletion: Have clear policies for inviting new partners, removing partners who choose to leave, and removing partners who do not wish to do so.
- Dissolution: Explain how you would liquidate the corporation and distribute any earnings if it were to go out of business.
- Partnership tax elections: Appoint a representative to the partnership to handle all tax communications.
- Death or disability: Clearly state how each partner's share of the business should be liquidated or allocated in the unlikely event that they pass away or become disabled.
Common mistakes to avoid in a Business Partnership Agreement
Missing key facts.
Partnership agreements frequently contain complicated terminology relating to particular subjects, and if someone doesn't understand it, they choose to ignore it. Just because something appears to be in the fine print doesn't mean it isn't necessary.
Believing things will work out.
Individuals frequently do business with people they like and trust because they believe there won't be any issues down the road. There is a partnership agreement to deal with these problems when they inevitably come up.
Not having the agreement reviewed properly.
According to the state and industry, partnership agreements might differ, and laws and best practices are always developing. If you choose not to have an attorney draft your agreement, at least make sure to review your agreement properly by taking the contract lifecycle management service Speedlegal which provides the proper analysis of all the key information and all the clauses in a summarized manner, before you sign the document.
Not amending the agreement after some time.
The governing documents for partnerships must be constantly modified to reflect the shifting nature of the business. If not, there can be problems that the document is unable to fix.
The security that comes from knowing that you and your partners are on the same page and have the same expectations and understanding about how your business will operate is well worth the time and expense it takes to create a partnership agreement. After several meetings and a small amount of paperwork, you'll have a contract that can protect you from future legal conflicts and a major headache.