A partnership is a business formed with two or more people as owners. Each individual contributes assets to the business and has a share in the profits and losses of that business. Some partners actively participate, while others are passive.
Partnership Agreements Defined
When you form a partnership, the most important document is a partnership agreement. Partnership agreements are legal documents subject to state laws, and each state has different requirements for language in these agreements.
The partnership agreement sets out all the terms and conditions agreed to by the partners. In this document, every possible contingency is included. The following is a list of points to be covered when preparing your agreement.
A partnership agreement governs:
- Relations among the partners, as partners, and between the partners and the partnership
- The business of the partnership and how that business is conducted
- How the agreement is amended
General Sections of a Partnership Agreement
These sections may be included in all types of partnership agreements. Some sections are specific to the type of partnership.
- Name of the partnership: There are several different types of partnerships, and you can include the type in your partnership's name, including the name the partnership is doing business as (if different).
- Principal office: The principal office is the place where documents are delivered. It may be the office of the chief executive officer or the office of a registered agent.
- Term (length) of the partnership: A partnership can be perpetual or for a specific term length.
- Purpose of the partnership: Describe the activities of the partnership, including what products or services it is selling.
- Types of partners in the partnership: The partnership may have general partners and limited partners, depending on whether they actively manage the partnership.
- Governing law: The law governing a partnership agreement sets the jurisdiction for disputes relating to the agreement. The governing law is usually state law. It’s important to make the governing law definition as broad as possible to cover all possible lawsuits.
Partnership at Will
This term means that the partners have not agreed to remain partners until the expiration of a definite term or completion of a particular undertaking. The “at-will” partnership status is the default, meaning that a partner can leave the partnership at any time if there is no specific language to prevent this action.
Nature of the Partnership Including Partnership Formation and Property
- Contributions of each partner: In cash, property (including intellectual property), and service. Each partner’s total contribution to the partnership at any one time is called “equity interest.”
- How new partners are admitted: How and when partners must make contributions to the partnership.
- Distribution of profits/allocation of losses to each partner: How profits and losses are allocated to partner shares.
- Draws to partners: How and when partners may take a withdrawal from their partnership share.
Relations of Partners to Persons Dealing with the Partnership
- Partner as agent (legal representative) of the partnership
- Liability of partners and how their actions affect their liability
Relations of Partners to Each Other and to the Partnership
- Partner rights and duties, for each type of partner.
- Standards of conduct, including conflict of interest policy.
- Management powers and duties, where one or more of the partners might take on management duties as managing partner(s), or the partnership might hire a manager.
- How decisions are made must be voted on, and a specific percentage of the partners must agree to any action.
- Partner time off, including leaves of absence, vacations, sick leaves.
- Transferable Interest is when and how a partner can transfer their partnership share to someone else.
What Events Cause Dissociation?
- Dissociation: When a partner leaves the partnership
- Partnership continuation: Dissociation as a partner both when the business continues and when it doesn’t.
- Continuity of partnership: When a partner leaves, dies, is terminated (may be part of the buy-sell agreement).
Other Clauses That You Might See in a Partnership Agreement
- Non-competition clause: This clause restricts a partner from leaving the partnership, and from competing with the partnership's business within a defined area and time period.
- Non-disclosure clause, non-solicitation clause: These clauses restrict partners and former partners from disclosing proprietary business, or from soliciting employees or customers away from the partnership.
- Mediation and arbitration of disputes, including mandatory arbitration, if agreed to.
Every partnership should have a partnership agreement to make sure that every possible situation that may affect the partners and the business is covered. The partnership agreement should also be reviewed periodically to make sure the wishes of the partners have not changed.
Using an Attorney to Prepare Your Partnership Agreement
The information in this article is intended to be a general overview and not a complete list of sections to include. This information is not intended to be tax or legal advice. You will need an attorney to help you prepare this document.