A signed partnership agreement is essential if you wish to start a business with a partner. You and your partners will be ill-equipped to resolve conflicts if you don’t spell out your rights and responsibilities in a written business partnership agreement. Minor misunderstandings may erupt into full-blown disputes if you don’t spell out your rights and responsibilities in a written business partnership agreement.
Partnerships, which are legal structures in which two or more people own and control a firm, allow companies to benefit from the different knowledge, skills, and resources of numerous owners. A partnership is similar to a sole proprietorship in that each partner owns a share of the assets and liabilities of the company.
Different aspects of launching and running a firm must be addressed upfront when more than one person is making decisions and influencing outcomes.
Here’s what you need to know to plan your partnership agreement strategy in a business partnership, plus some other steps you can take to make that partnership effective.
Partnership Agreement Definition
A business partnership agreement is a legal document between two or more business partners that outlines the company’s structure, each partner’s responsibilities, capital contributions, partnership property, ownership interests, decision-making conventions, the process for one business partner to sell or leave the company, and how the remaining partner or partners split profits and losses.
As organizations grow from solo practices to partnerships or ensembles, it’s good to have formal partnership agreements in place. The most important reason is that it specifies the business’s ‘rules of engagement’ with its owners… and gives out a strategy for dealing with entity-level problems.
While most business partnerships do not start with worries about a future partnership conflict or how to dissolve the company, these agreements can help guide the process in the future, when emotions may otherwise take control. Rather than an informal agreement between partners, a written, legally binding agreement serves as an enforceable instrument.
Also read: Business Structures: Different Types of Business Structures Explained
What are the Principles of Partnership Agreement?
They include:
- Shared knowledge,
- Innovation,
- Agreed Goals,
- Trust
- Balance of return
What is Included in the Partnership Agreement?
The partnership agreement specifies who owns what percentage of the company, how revenues and losses will be divided, and the assignment of tasks and responsibilities. The partnership agreement will also usually specify how disputes will be resolved and what would happen if one of the partners dies early.
Can You Draft Your Own Partnership Agreement?
If you are a business owner wishing to create your own partnership agreement, you can do it by using free online templates. To ensure that the agreement complies with federal, state, and local laws, it is best to consult with a business lawyer or a partnership agreement counsel.
What are the Legal Requirements of a Partnership?
The participants in the partnership must reach an agreement. A Partnership Agreement is used to accomplish this. All of the partners will be noted here, as well as what they will contribute to the relationship. This agreement will also specify how profits will be divided.
Why is it Important to Have a Partnership Agreement?
A company partnership agreement is required because it sets a set of agreed-upon norms and processes that the owners must sign and accept prior to any issues arising. If any problems or disagreements emerge, the business partnership agreement outlines how to handle them.
No one enters into a business partnership expecting it to fail. However, if it fails, the consequences might be severe. However, having the appropriate agreements in place, which should always be established by a trained attorney, makes any possible business partnership problems much easier to settle and/or legally enforceable.
In other words, if things go wrong, a business joint agreement protects all partners.
Partnership Agreement Format
Your joint agreement must cover a wide range of structures, which are as follows:
- 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
Name of your Partnership
While it may seem obvious, the name of your firm is one of the first things you and your partner(s) must agree on.
Contributions to the Partnership and Percentage of Ownership
Make a list of the precise contributions you and your company partner(s) will make. Also make a decision on the percentage of ownership, which is normally determined by each partner’s contributions to the business.
Division of profits, losses and draws
You and your partner must decide how to split the earnings, losses, and draws from the business. Partners can opt to split profits and losses based on their ownership percentages, or earnings and losses might be shared equally among all partners regardless of ownership holding.
Partners’ authority
The partnership agreement should define partnership authority, often known as binding power. The capacity to bind the business to a debt or a contractual commitment might expose the company to needless risk, which is why the joint agreement should explain specifically who has binding authority.
Withdrawal or death of a partner
While no one wants to think of a partner’s withdrawal or sudden death just as they’re about to launch a new firm, it’s something that needs to be addressed in the partnership agreement. The agreement should also spell out the business’s valuation procedure and any criteria for keeping a life insurance policy with the other partner(s) as beneficiaries.
Read also: Limited Partnership: Overview, Taxation, and Examples
How to Write a Partnership Agreement
Here is the step-by-step guide on how to write a partnership agreement:
- Title the document
- List the partners and their residences
- Identify the type of business
- Provide a name for the partnership
- State the place of business
- Identify the terms of existence
Title the document:
Begin the partnership agreement by stating that it is a partnership agreement. Center the words “Partnership Agreement” at the top of the page.
List the partners and their residences:
The names of the partners and their willingness to be bound by the partnership agreement should be listed first in a partnership agreement.
Determine how partners will be referred to in the document after stating their names and places of residence. Type: “Hereinafter referred to as partners.
Declare that they agree to the following terms and conditions: “The Partners agree to the following terms and conditions”.
Identify the type of business
Determine the type of business the partnership will be under the names of the partners. “The partners freely associate themselves as partners to execute the general business of [insert business, e.g., “offer legal services” or “perform accountancy services”] and any other sort of business from time to time as decided by the Partners,”
Provide a name for the partnership
Next, decide on the partnership’s name: “The Partnership’s name shall be [insert name].”
The names of the partners are usually used in partnerships: for example “Wilson, White, and Desmond, Partners.”
You can also use a fictitious name. Check to see whether the name has already been taken. You should check with your county clerk’s office to see if the name has already been taken.
If you’re forming a Limited Liability Partnership, check with your state filing office to see if the name you choose has already been taken.
State the place of business
The location of the partnership is a crucial piece of identifying information. Use the following language to identify it: “The Partnership’s principal place of business shall be [insert location] and such other places as the partners may agree upon.”
Also read: Business Structures: Different Types of Business Structures Explained
How to Decide Partnership Percentage
You can split earnings however you wish in a company partnership, with one caveat: all business partners must agree on profit-sharing. You can choose to split the profits evenly between the partners, or each partner can receive a separate basic pay and then split any remaining profits. It will be up to you and your business partners to decide how you want to arrange your profit-sharing agreement.
Remember that in a 50-50 partnership, neither partner can make a decision without the permission of the other, whereas in a 51-49 relationship, one partner has ultimate control. (Learn how to set your own wage as a business owner.)
You might agree to give the more active partner a bigger wage if you know ahead of time that one or more partners will only play a minor role in income-generating activities.
Whatever you decide, creating a profit-sharing agreement and including it in your wider partnership agreement is an excellent idea. To avoid future issues, all partners should agree and sign.
Partnership agreement sample
ABC and CBA are forming an agricultural marketing firm together. They’ve chosen to form a partnership and require an arrangement to spell out the parameters of their partnership.
Because ABC has more expertise, they have agreed that she will handle the majority of the business operations. The client engagement will be handled by CBA specifically. ABC will keep more of the profit since she will have more duties. They can ensure that there are no misunderstandings later on by writing this arrangement very clearly in the partnership agreement.
Business Partnership Agreement Templates
These resources could assist you in drafting your own business partnership agreement if you’re looking for a free template online. At the following sources, you’ll discover dozens of free business partnership agreement templates:
While these free online business partnership agreement templates are useful for getting started and considering what to include in your agreement, it is always a good idea to have legal counsel evaluate your draft agreement and assist you in revising and finalizing it before signing. You and your partners can sign the agreement to make it official once a lawyer determines that it is thorough and legally binding.
Standard partnership agreement
Although there are many different forms of partnership firms, the partnership agreement sets the partners’ managerial authority as well as their legal rights and obligations. Whether the partnership is created under a state statute or there are differences in the status of each partner, there are specific requirements that should be included in a conventional partnership agreement. The name of the business, the general category of the business, and the duration of the business should all be included in the partnership agreement.
The partners may agree to either designate a fixed date for the business to end or state that the firm will continue indefinitely. The process for dissolution and when a partner departs the company should be included in the agreement. The partnership agreement should also describe each partner’s capital contributions, profit and loss-sharing percentages, and decision-making authority and responsibilities.
LLC partnership agreement
State statutes govern the formation of limited liability partnerships. LLP agreements, together with other paperwork required to register the partnership as an LLP, must be filed with the Secretary of State’s office. LLP agreements are similar to general partnership agreements, with the exception that they include wording stating that the partners are not personally liable for the business’s debts.
Partnership agreement contract
When two or more people organize and manage a firm for profit, it is called a business partnership. A business partnership contract lays out the goals of the partnership, as well as the methods for making decisions that bind the partnership and resolving disputes. The partnership contract also contains terms that impact the financial aspects of the firm as well as each partner’s power to oversee the day-to-day activities.
What Is Profit-Sharing in a Business?
The way you split your profits is determined by the terms of your business partnership agreement. When drafting your partnership agreement, be sure that all of the business partners agree on how earnings will be split. You can split the profits evenly or give each partner a defined wage and then divide the remaining profits in a specific method.
If two persons join a 50-50 partnership, they will both have to make profit-sharing decisions together and will need each other’s agreement to do so.
Why Does a Business Need a Business Partnership Agreement?
A business partnership agreement is required because it sets a set of agreed-upon norms and processes that the owners must sign and accept prior to any issues arising. If any problems or disagreements emerge, the business partnership agreement outlines how to handle them.
How Do You Structure a 50/50 Partnership?
Each partner in a 50/50 partnership has an equal say in the business’s general operation and management. All company partners must give their approval, involvement, and trust in order to create a 50/50 partnership. Before signing the agreement, make sure to clarify all business goals, each partner’s degree of commitment, and wages to minimize disagreement and maintain trust between you and your partner(s).
What Happens if a Partner Wants to Leave?
Will they be bought out by the other partners? Will you allow them to keep their stock but deny them voting rights? If you need to buy out a partner, you’ll need to properly appraise the business’s value before calculating the current value of that partner’s shares. You might engage a business valuation firm to determine a rough estimate of your company’s worth. This will make calculating how much their piece is worth much easier.
Conclusion
It might be difficult to divide ownership between two or more partners. It’s difficult to foresee how hard each person will work at the outset, let alone truly equitable ownership and profit split.
Splitting based on initial investment is straightforward, but it does not guarantee long-term justice. Things change with time, so the best you and your partners can do is establish ground rules for healthy communication and conflict resolution.
As your firm expands, you may want to explore converting it to an LLC or Corporation at some point in the future.
You’ll be able to reevaluate and redistribute ownership from a better vantage point at this point, but be aware that there will be a lot of paperwork and procedures to fill out.
- Business partnership agreement: How to structure a business partnership agreement
- General Partnership Definition: Taxes, Liability & Agreement
- BUSINESS DEFINITION: Types, Examples and Strategy
- Limited Partnership: Overview, Taxation, and Examples
- General Partner Definition, Agreement, Liability & Comparisons
