Partnership Agreement Sections and Important Clauses
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.
Check with your state’s secretary of state/business division on partnership agreement requirements.
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. : These clauses restrict partners and former partners from disclosing proprietary business, or from soliciting employees or customers away from the partnership. 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.
In many ways, a business partnership is like a personal partnership. The people involved in both kinds of partnerships need to have clearly communicated understandings. In business, especially, those understandings should be in writing.
If something happens to a partner, there’s a dispute between partners, or there is a change in the partnership, everyone needs to know “what happens if.” A partnership agreement is the best way to assure that the business—and personal—part of the relationship can survive.
What is a Partnership Agreement?
A partnership agreement is a contract between partners in a partnership which sets out the terms and conditions of the relationship between the partners, including:
- Percentages of ownership and distribution of profits and losses
- Description of management powers and duties of each partner
- Term (length) of the partnership
- How the partnership can be terminated
- How a partner can buy his/her share of the partnership.
A partnership agreement should be prepared when you start a partnership. An attorney should help you with the partnership agreement, to make sure you include all-important “what if” questions and avoid problems when the partnership ends.
Read more about all the terms a partnership agreement should contain in “Partnership Agreement Terms.”
The Importance of the Agreement
Basically, a partnership agreement is set in place to deal with every possible situation where there might be confusion, disagreement, or change.
Attorney R. Shawn McBride explains:
Here's why every partnership should have an agreement, right from the beginning:
- To set up the roles and responsibilities of each partner and to describe how decisions are made. Who is the managing partner? What are the responsibilities of individually named partners? How do roles and responsibilities change?
- To avoid tax issues, by having the tax status of the partnership spelled out, and to show that the partnership is distributing profits based on acceptable tax and accounting practices.
- To avoid legal and liability issues, spelling out the liability of individual partners (general partners vs. limited partners) and the liability of all partners if there is a liability issue with one partner.
- To deal with changes in the partnership due to life challenges of existing partners – partners who leave, become ill or incompetent, get divorced, or die. These are usually dealt with in buy-out agreements with each partner.
- To describe the circumstances under which new partners can enter the partnership.
- To deal with partner issues, like a conflict of interest and non-compete agreements.
- To override state laws. Some states have required language in partnership agreements. But this language may not be the best for your particular partnership. If you don’t have a formal written agreement, you may find yourself having to abide by the default state laws.
- To make disputes easier. It’s a good idea to include language in your partnership agreement that describes how disputes will be handled. Will arbitration be a possibility? What will be the responsibility of parties to the dispute? Who pays for what?
Why You Need an Attorney to Help Prepare a Business Partnership Agreement
The only disadvantage to having a partnership agreement is that you might have language that is unclear or incomplete. A DIY partnership agreement risks not getting the wording right, and a poorly worded contract is worse than none at all.
Getting an attorney to help you with the process of preparing your partnership agreement seems like it's an expensive waste of time. It's not. Remember, if it isn't in writing, it doesn't exist, so putting every possible situation or contingency into a partnership agreement can prevent expensive and time-wasting lawsuits and hard feelings between the partners.
Disclaimer: The information in this article, and on this site, is intended to be for general information purposes. I am not an attorney or CPA, and you should talk to your legal and financial advisors before entering into any contract.
Deciding to go into business with a partner is an extremely important decision. Here are some tips for approaching and creating your partnership agreement.
By: Sean Peek, CO— Contributor
Deciding to go into business for yourself is a major decision on its own — but deciding to join forces with a partner is a completely different ballpark. If you’re thinking about starting a business with a partner, consider structuring your business as a general partnership.
General partnerships are one of the most common legal business entities, granting ownership to two or more people who share all assets, profits and liabilities. In a general partnership, it’s important to understand that each person is responsible for the business and is liable for the actions of their partner(s). To help avoid any issues with your partners throughout your business journey, you’ll want to write a partnership agreement before moving forward.
What is a partnership agreement and why do you need one?
Nolo noted that, because you and your partners are equally responsible for the business as well as the outcomes of one another’s decisions, creating a partnership agreement is a great way to structure your relationship with your partners to best suit your business.
Partnership agreements are a protective measure to ensure any and all disagreements can be resolved quickly and fairly, and to understand what to do in the event that the partners wish to dissolve the working relationship or business in its entirety.
What should be in a partnership agreement?
Your partnership agreement needs to cover a lot of ground. According to Investopedia, the document should include the following:
- Name of your partnership. While it may seem like common sense, one of the first things you and your partner(s) must agree on is the name of your business.
- Contributions to the partnership and percentage of ownership. Create a list of specific contributions you and your partner(s) will make to the business. In addition to contributions, you must decide on the percentage of ownership, which is typically dictated by each partner’s contributions to the business.
- Division of profits, losses and draws. You and your partner must decide how to divide the business’s profits, losses and draws. Partners can agree to share the profits and losses in accordance with their percentage of ownership, or they can be distributed equally amongst the partners regardless of ownership stake.
- Partners’ authority. Partnership authority, also known as binding power, should be defined within the partnership agreement. The ability to bind the business to a debt or a contractual agreement can expose the business to unnecessary risk, which is why the partnership agreement should explicitly state which partner(s) have binding authority.
- Withdrawal or death of a partner. While no one wants to consider the possibility of a partner’s withdrawal or untimely death on the brink of launching a new business, this is something that needs to be clearly stated in the partnership agreement. The agreement should also outline the valuation process for the business and/or any requirements for maintaining a life insurance policy designating the other partner(s) as the beneficiaries.
To avoid conflict and maintain trust between you and your partner(s), be sure to discuss all business goals, the commitment level of each partner and salaries prior to signing the agreement.
Advantages and disadvantages of a partnership
There are several advantages and disadvantages of a general partnership. Some advantages include:
- Being easy to establish.
- Simplifying your taxes.
- Being easy to dissolve.
The two main disadvantages of general partnerships are:
- Personal assets aren’t protected.
- Partners are liable for each other.
How do you structure a 50/50 partnership?
According to UpCounsel, under a 50/50 partnership, each partner has an equal say in the overall operation and management of the business. Structuring a 50/50 partnership requires consent, input and trust from all business partners. To avoid conflict and maintain trust between you and your partner(s), be sure to discuss all business goals, the commitment level of each partner and salaries prior to signing the agreement.
Additionally, before you draft or sign a partnership agreement, be sure to consult with an experienced business attorney to ensure everyone’s investment in the partnership and business is protected.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
If you’re thinking about starting a business partnership, it’s important to have a partnership agreement in place to spell out each party’s duties, financial obligations and legal liability.
Some states even require a partnership agreement to be filed along with business formation documents.
Here are five clauses every partnership agreement should include:
- Capital contributions. Your partnership agreement should explicitly state what contributions each partner will make to the partnership and the percentage of ownership interest they will each take. Cash is the most typical contribution, although property, securities, assets, and even certain skills can also be listed as valid business contributions.
- Duties as partners. One of the drawbacks of partnerships is the risk of unclear authority. For that reason, a large part of your partnership agreement should spell out the partners’ duties. This includes specifying each partner’s level of authority, business decision-making power, important management duties (not minor ones), and other responsibilities.
- Sharing and assignment of profits and losses. Allocation that is proportionate to each partner’s ownership percentage is a popular way to allocate and distribute profits and losses. The agreement should also specify whether partners will be able to take a regular “draw” — a withdrawal from his or her allocated profits — each year, or whether the partners can take their entire allocated profits. This will depend on the partners’ financial needs.
- Acceptance of liabilities. Depending on the type of partnership you’re entering into, each partner may (or may not) be held personally liable for the business obligations of the partnership. As this can expose the partners’ personal assets should the business become indebted and insolvent, it’s an essential element to consider when forming your partnership.
- Dispute resolution. As with most business ventures, you should expect to have a “heated disagreement” or two with your business partners. Have a clause in your agreement that spells out how deadlocked disputes will be handled. For example, instead of allowing the partners to go to court, you could require that arbitration or mediation is used first.
Of course, these are just a few of the key clauses that should be included in every partnership agreement. Because partnership agreements can get complicated, it may be best to consult an experienced business lawyer who can help draft a legally binding agreement tailored to your exact needs. Another option is to use a template legal form, which you can purchase nline.
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A Partnership Agreement is a contract between two or more individuals who would like to manage and operate a business together in order to make a profit. Each Partner shares a portion of the partnership’s profits and losses and each Partner is personally liable for the debt and obligations of the Partnership.
One benefit of a Partnership is that Partnership income is only taxed once. Partnership income is distributed to the individual Partners who are then taxed on the partnership income. This contrasts with a corporation where income is taxed at two levels: first as a corporate entity and then at the shareholder level where shareholders are taxed on any dividends they receive.
The Partnership Agreement describes the Partner responsibilities, outlines the ownership interest in the Partnership, defines the profit and loss distribution of each Partner, prepares the Partnership for common business scenarios, and includes other important rules about how the Partnership will be managed and conduct business.
The document is a critical foundational document for running a new business and serves to set the business up for success by ensuring clear communication and defined responsibilities for all of the Partners. This Agreement documents both contingency plans for when things go wrong as well as descriptions of the Partnership’s day-to-day operations. A Partnership Agreement protects all of the Partners involved in the business and any individuals who plan to do business together should complete a Partnership Agreement.
How to use this document
A Partnership Agreement can be created either as a first step to outline Partner expectations and responsibilities before the Partners begin doing business together or after the Partnership has already been in business if a Partnership Agreement was never created and the Partners wish to codify or clarify how the Partnership operates. No matter when in the life of a Partnership a Partnership Agreement is created, the Agreement will cover the following ground:
- Partnership name: the legal name under which the Partnership will do business
- Purpose of the Partnership: a brief description of the business that the Partnership will conduct
- Partner information: the legal names and addresses of all of the Partners currently involved in the Partnership
- Capital contributions: a description of the cash, property, services, and other resources initially contributed to the Partnership by each of the Partners
- Ownership interest: a description of the percent of the Partnership owned by each of the Partners
- Profit/Loss distribution: a description of how the profits and losses of the Partnership will be distributed between the Partners, often based on capital contributions and/or ownership interest, and how often distribution will take place
- Management and voting requirements: a description of how the Partnership will be managed, how voting weight will be determined, and whether unanimous or majority votes will be required to make important decisions about the finances and operations of the Partnership
- Partner addition and withdrawal: the guidelines for how the Partnership will handle the addition of Partners, the voluntary withdrawal of Partners, and the involuntary withdrawal of Partners
- Partnership dissolution: an outline of the circumstances under which the Partnership can be dissolved and a description of how the remaining assets of the Partnership will be divided between the Partnership if the Partnership is dissolved
The Agreement also includes the ability to define management roles within the corporation if the Partners wish to do so. Once the Partnership Agreement is completed, all of the Partners should sign and date the Agreement and keep copies of the Agreement for their records. If the Partners wish to change any of the terms of the Agreement, they should be sure to do so in writing.
Partnership Agreements are subject to the laws of individual states. There is no one federal law covering the requirements for a Partnership Agreement. This is because each individual state governs the businesses formed within that state.
How to modify the template
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Guides to help you
Other names for the document: Articles of Partnership, Business Partnership Agreement, Creation of Partnership Agreement, Formation of Partnership Agreement, General Partnership Agreement
According to Investopedia, the document should include the following:
- Name of your partnership.
- Contributions to the partnership and percentage of ownership.
- Division of profits, losses and draws.
- Partners’ authority.
- Withdrawal or death of a partner.
What is a partnership agreement letter?
A Partnership Agreement is an agreement between two or more individuals who would like to manage and operate a business together in order to make a profit. Each partner shares a portion of the partnership’s profits and losses and each partner is personally liable for the debts and obligations of the partnership.
What are 5 things that should be included in a partnership agreement?
Here are five clauses every partnership agreement should include:
- Capital contributions.
- Duties as partners.
- Sharing and assignment of profits and losses.
- Acceptance of liabilities.
- Dispute resolution.
What is a general partnership example?
Example of a General Partnership For example, let’s say that Fred and Melissa decide to open a baking store. By opening a store together, Fred and Melissa are both general partners in the business, F&M Bakery. It is important to note that each general partner must be involved in the business.
What documents are required for a partnership?
Current Bank Account
- Partnership deed.
- Partnership firm PAN card.
- Address Proof of the partnership firm.
- Identity proofs of all the partners.
- Partnership registration certificate (if partnership has been registered)
- Any registration document issued by central or state government (normally GST certificate is submitted)
What elements should be included in a written partnership agreement?
However, there are at least 8 key provisions that every partnership agreement should include:
- Your Partnership’s Name.
- Partnership Contributions.
- Allocations – profits and losses.
- Partners’ Authority and Decision Making Powers.
- Departure (withdrawal) or Death.
- New Partners.
- Dispute Resolution.
How do you write partnership agreement?
Part 1 of 5: Preparing to Write the Agreement Read the Uniform Partnership Act. In the absence of a partnership agreement, your state law will provide default rules that govern the partnership. Meet with the other partners. One benefit of drafting a partnership agreement is that it encourages the members to think upfront about a variety of issues, such as the Assign drafting to one person.
What are the rules of a partnership agreement?
Partnership name: the legal name under which the Partnership will do business Purpose of the Partnership: a brief description of the business that the Partnership will conduct Partner information: the legal names and addresses of all of the Partners currently involved in the Partnership
What should be in Your partnership agreement?
What to put into a partnership agreement?
This restaurant partnership agreement template contains several text fields. Each partner should review the entire document and complete the fields assigned to them prior to signing.
This restaurant partnership agreement, entered into on [Document.CreatedDate] , by and between, and , hereafter collectively known as the Partners, shall govern the founding, governance, and operation of the business venture listed below, hereafter known as the Restaurant:
This section of the template identifies and describes the restaurant being established by the partnership.
This section of the template identifies and describes the restaurant being established by the partnership.
The terms and conditions in this template are intended to be fair and equal to both partners and provide clear guidance regarding the operation of the restaurant and the participation of each partner.
Whereas the Partners wish to collaborate in the ownership, governance, and operation of the Restaurant, the Partners agree to the following:
- The Partners agree to register the Restaurant as a limited liability corporation in [Restaurant.City] , [Restaurant.State] . Each of the Partners shall hold an equal share of ownership in the Restaurant.
- The Restaurant’s principal place of business shall be the address listed above. All records related to the partnership or the Restaurant shall be maintained at this address.
- This restaurant partnership agreement shall commence as of the date it is signed by both partners and shall continue indefinitely until rightfully dissolved by either partner.
- The Partners agree to make equal capital and time contributions as necessary to ensure the success of the Restaurant.
- The Partners agree to make joint decisions regarding the operation of the Restaurant. Neither partner shall make decisions related to the strategy or operation of the Restaurant without consulting the other Partner.
- The Partners agree to designate a hired individual as a general manager for the Restaurant. This individual shall be responsible for the daily operation of the Restaurant and shall be granted decision-making authority commensurate with such a position.
- The Partners shall establish accounts at Restaurant. Bank for the Restaurant’s financial needs. All capital contributions shall be deposited into this account. No withdrawals shall be made from this account by either Partner without approval from both Partners.
- Neither Partner shall enter into any additional partnerships, contracts, or ventures related to the Restaurant without approval from the other Partner.
- The Partners may continue to engage in additional, non-related business interests, but must disclose those ventures to the other Partner.
- The Partners shall receive compensation from the Restaurant in the form of profit shares, to be calculated and distributed equally on an annual basis.
Both partners should sign the agreement using the template’s e-signature fields prior to downloading a final copy.
In witness whereof, the Partners hereby enter into this restaurant partnership agreement as of the dates signed below.
A partnership agreement is a legally binding document between two or more business partners that establishes the responsibilities, profit and loss distribution of each partner. Often, partnership agreements include a variety of general rules for each member to follow. A partnership agreement is an essential document for and team, group or duo intending to build a business together. It should be created long before worrying about your commercial building maintenance provider. If you are part of an entrepreneurial partnership, learning how to write up this type of contract could be essential to your project’s success. To learn more about how you can write up a partnership agreement, keep reading below for our step-by-step guide.
Step 1: Identify Those Involved
Every contract must start out explicitly stating the parties involved. For the purposes of a partnership contract, you would need to list each of your names, as well as the company or partnership alias you plan to operate under. This step is essential because the contract can only be effective when all included parties are understood.
Step 2: Agreed Contributions
The next step to crafting this type of document is to identify the agreed upon contributions of each party. The initial investments of each partner is an important part of the contract because it may effect who is given the authority to make business decisions or who receives a larger percentage of future profits. This is especially important if you are considering dental practice financing or another type of business financing. Sit down with your partner and discuss what resources each of you are putting into the business so that you can agree upon these terms.
Step 3: Decision Making
You want to be sure to include a decision making process in your partnership agreement. This should include how you will make business decisions, specifically when there is a tough decision to be made and no general consensus shared. Creating a decision making clause that includes step by step direction for how to proceed, if at all, in the case of a deadlock will prevent you from business disputes further down the road. Make sure to include this part in your partnership agreement.
Step 4: Profit And Loss Allocation
Once you have determined who is contributing what, you are ready to discuss profit and loss allocations. You must decide if business profits and losses will be allocated in proportion to the partner’s ownership interest. You may wish to consult a Yacktman professional before making these decisions. Take the time to consider your varying financial needs and come up with a solution that suits both parties.
Step 5: Partnership Authority
Identifying the partnership authority dynamic will be another crucial point for your partnership agreement. This is where you will identify the authority of each individual partner. Will one person be making the official decisions? Will you consult one another on everything? It is good to outline the boundaries of each partner’s authority to ensure that everyone operates within their limits.
Step 6: Resolving Disputes
In order to finish your partnership agreement, you will need to have a section dedicated to resolving disputes. There, you will determine what happens when the individual partners cannot agree upon a decision. If there is a deadlock will you go to court or find another way to come to an agreement? Expressly state your options in the partnership agreement so that everyone knows the potential outcomes of a disagreement. This is much more important than deciding on a telephone answering service right away.
Creating a partnership agreement does not always require the direct consultation of an expensive lawyer or PPI. Especially if you are just starting out in the business industry, it may pay off for you to take the time to craft your own partnership agreement. As long as you follow the outline listed above, you will have a sufficient contract available to help guide you and your partner on the path to success.