A Partnership Agreement serves as the cornerstone for any successful business collaboration, providing a legal framework that defines roles, responsibilities, and the distribution of profits and losses among business partners. In this guide, we'll delve into the significance of Partnership Agreements, the different types, and crucial details to include. Whether you're a seasoned entrepreneur or entering a new business venture, having a reliable Partnership Agreement is essential for safeguarding interests and preventing potential disputes.

Table of Contents

• What is a Partnership Agreement?
• When to Use a Business Partnership Agreement
• What to Include in a Partnership Agreement?
• Why it's Important to Create a Partnership Agreement?
• How to Write a Partnership Agreement?
• Frequently Asked Questions
• Partnership Agreement Sample

What is a Partnership Agreement?

A Partnership Agreement is a legal document outlining the terms of a business partnership, serving as an internal guide for partners. It identifies key elements such as partners' names, business name, purpose, place of business, profit distribution, and partner contributions. Utilizing a Partnership Agreement template ensures a clear understanding between partners, promoting confidence in meeting business requirements.

Types of Partnership Agreements

Understanding the types of partnership agreements is crucial for tailoring your document to suit specific business needs. The three main types are:

1. General Partnership Agreement: Involves shared ownership with shared rights and responsibilities.
2. Limited Partnership Agreement: Comprises general and limited partners with differing roles and degrees of liability.
3. Limited Liability Partnership (LLP) Agreement: Combines tax benefits of a general partnership with personal liability protection similar to a limited liability company.

Additional variations include the 50/50 partnership agreement, small business partnership agreement, and real estate partnership agreement.

When to Use a Business Partnership Agreement

Any collaboration for profit, whether among individuals, friends, or family, forms a partnership. A written Partnership Agreement is essential for formalizing this arrangement, providing clarity on how the partnership operates. Investors, lenders, and professionals often require this agreement before providing support, emphasizing its importance in securing financial backing and legal assistance.

Benefits of a Partnership Agreement:

• Provides clarity and structure for the partnership.
• Avoids costly legal proceedings.
• Prevents reliance on state default rules.
• Mitigates the risk of unwanted dissolution.

What to Include in a Partnership Agreement?

A well-crafted Partnership Agreement should cover essential details, including:

• Partners' details and contributions.
• Business location and purpose.
• Duration of the partnership.
• Profit and loss distribution.
• Procedures for partner changes, dissolution, withdrawal, retirement, and removal.
• Financial details such as capital and income accounts.
• Management protocols, including books and records maintenance.

Additionally, it's crucial to register your partnership's trade name with the appropriate state authorities.

Can You Change a Partnership Agreement?

Yes, a Partnership Agreement can be modified using a Partnership Amendment. Common reasons for amendments include additional investments or the need for new provisions to govern the partnership effectively.

Why it's Important to Create a Partnership Agreement?

Creating a Partnership Agreement is essential for several reasons:

• Avoiding default partnership rules: Prevents reliance on state rules by providing a tailored framework.
• Managing tax liability: Defines each partner's share of profits and losses, avoiding unexpected tax complications.
• Preventing disputes: Clearly outlines decision-making processes, responsibilities, and dispute resolution methods.
• Ensuring financial clarity: Details financial contributions and entitlements, minimizing confusion and disputes.

By understanding the importance of a Partnership Agreement, you empower your business collaboration with the tools needed for long-term success.

How to Write a Partnership Agreement

Writing a Partnership Agreement doesn’t have to be complicated; follow these steps:

Step 1 – Partner Information

a) List the state governing the agreement

b) List the date the agreement was signed

c) List partner names and complete physical addresses

An example of where to include partner details in our template.

Step 2 – Partnership details

a) Provide the complete legal name of the partnership entity. It should be the name you have registered with your appropriate state department. If you have not formally created your legal entity, check with your state to ensure that the name you are using is available and check to be sure that you are not infringing on any existing trademarks.

You may also want to file with the state to reserve the name.

b) Describe the purpose of your business and list the types of business activities you will be engaged in.

c) This is the address where the business will operate and conduct business. This should be a physical address, not a PO Box. If you have registered your business with your state, you should provide the address you used in that filing here.

You can use a personal address if you are a completely virtual business without a physical business address.

d) Provide the date that the partnership will become effective. This can be done immediately upon signing this document or later. If you have a specific date for the partnership to end, you will list it here.

Otherwise, you will choose the preceding option, and the partnership will terminate upon the happening of events and as prescribed in the partnership agreement.

Step 3 – Partner Capital Contributions

a) If partners are required to make capital contributions to the partnership, you must state when those contributions should be made here. You can choose when contributions should be received (for example, within 30, 60, or 90 days of the effective date of this agreement or on or before a set date).

b) Contributions are how much and what each partner will invest. They can be in the form of cash, property services, or expertise. You will list the number of contributions and describe the contributions here.

An example of where to include partners’ capital contributions in our Partnership Agreement template.

Step 4 – Capital Accounts, Profits and Losses, and Income Accounts

a) Capital accounts can pay out interest. You can decide whether the partners’ capital accounts will or will not pay out interest to any, all, or none of the partners depending on specific partner contributions and/or the goals and operations of your business.

b) Depending on each partner’s initial and future contributions, you can choose to divide profits and losses:

• equally between the partners
• proportional to each partner’s capital contributions
• according to set percentages

Partners can also choose to distribute the profits at a different ratio than the losses.

c) Each partner will have a separate income account. The partner’s share of profits and losses will be credited to or charged against. You can choose whether interest will or will not be paid to any, all, or no partners here.

Step 5 – Partners’ Salary and Drawings and Partnership Bank Accounts

a) Partners can receive a salary for their labor and services. It is essential to consider the partnership’s profits, the goals of the partnership, and the partners’ contributions when determining salary.

The IRS considers a partner to be an employee only if the partner provides services other than their capacity as a partner, which could affect how both the partnership and the partner are taxed.

b) Choose this option if no salary will be provided to any partner.

c) Choose how partners can withdraw their profits from their income account here, either withdraw anytime, with written consent from all other partners, or at the end of a set period (monthly, quarterly, or yearly).

d) Provide the name of the financial institution where partnership funds will be held and list who can withdraw and sign on behalf of the partnership on this account.

It can be all partners, anyone partner, a majority of partners, or another arrangement you have decided upon.

Step 6 – Partnership Books and Records

a) This is the physical address where books and records will be stored. This can be at the partnership’s principal place of business or elsewhere, like with a lawyer or CPA.

b) Choose who can inspect the books and records, any partner and their representative, or any partner.

c) List the partnership’s fiscal year. Most businesses will follow a calendar year, but you can choose any date for the beginning and end of your fiscal year.

d) This is at your discretion but typically occurs within a few months. You want to be aware of state or federal deadlines that may require this information when deciding the deadline to prepare the statement and balance sheet.

e) Choose when audits can be performed at a partner’s request or the end of the fiscal year.

Step 7 – Management and Voluntary Dissolution of Partnership

a) You can decide to allow each partner the sole authority to make decisions on behalf of the partnership. If you want to limit this authority, you can restrict this decision-making authority to only significant or ordinary choices.

A partner can decide on behalf of the partnership or bind the partnership to a contract without consulting the other partners.

b) You can choose to have the partnership dissolved upon unanimous consent of the partners or another event. It is standard to liquidate and wind up the partnership’s affairs and distribute any remaining proceeds upon dissolution.

An example of where to include management and voluntary dissolution of partnership details in our template.

Step 8 – Partner’s Withdrawal

a) There are several ways a partner can leave the partnership. You can allow them to leave at any time or only after a certain number of years by providing a certain number of days’ notice. Or you can enable them to go only with the unanimous consent of the other partners.

Once a partner leaves, you can have the partnership automatically terminated, allow the other partners to purchase the interests, or give them the option to choose between both.

An example of where to include information about a partner’s withdrawal is in our Partnership Agreement template.

b) At some point, the partnership may decide that a specific partner’s actions are so harmful and detrimental to the partnership they need to be removed.

Step 9 – Partner Retirement and Partner Death

a) A partner may choose to retire from the business before the end of the partnership. You can allow a partner to withdraw or require retirement at a specific time.

An example of where to include details about partner retirement is in our template.

b) List the time allotted to provide written notice of intent to purchase the remaining partners of the deceased partner’s interest after death—for instance, 14 days.

Where to include partner death details in our Partnership Agreement template.

Step 10 – Buyout, New Partners, and Arbitration

a) The buyout price is the price the partners must pay for the withdrawing, retiring, or deceased partner’s interest.

An example of where to include buyout information in our template.

b) Your Partnership Agreement can specify that no new partners will be admitted to the partnership at any time or that new partners will be admitted to the partnership upon the agreement of the current partners.

c) All parties agree to resolve disputes over the agreement by arbitration. Arbitration is when an arbitrator, a neutral third party selected by the parties, evaluates the dispute and determines a settlement. The decision is final and binding.

Choose the state in which you would like any arbitration hearing held. Typically this will be the state governing this agreement.

Where to include new partner information in our template.

Step 11 – Signatures

a) Partner signature and full name

b) Representative signature and full name.

Where to include signatures in our partnership agreement template.

In conclusion, a meticulously crafted business plan is an indispensable tool for entrepreneurs navigating the complexities of business. Utilize our template and document builder to embark on this journey with confidence, ensuring that your business plan becomes a beacon guiding your success.

Frequently Asked Questions

Can a Partnership Agreement be modified?

Yes, a Partnership Agreement can be modified through a Partnership Amendment. Common reasons for amendments include additional investments, changes in business structure, or the need for new provisions to govern the partnership effectively.

What happens if there is a dispute among partners?

The Partnership Agreement can include provisions for dispute resolution, such as arbitration, mediation, or litigation. Clear guidelines on decision-making processes and responsibilities also help prevent conflicts. Having these provisions in place ensures a structured approach to resolving disputes.

How does a Partnership Agreement impact taxation?

A partnership itself is not taxed; instead, it is a "pass-through" entity where profits and losses pass through to individual partners. The Partnership Agreement outlines each partner's share of profits and losses, preventing unexpected tax liabilities and ensuring fair taxation based on contributions.

Partnership Agreement Sample