A partnership agreement is a written document that outlines how a partnership will be managed and each partner’s rights and responsibilities. A written partnership agreement can minimize the frustrations of maintaining a partnership and provide guidance on key partnership issues. While the business the partnership undertakes may be very successful, partnership issues can cause an otherwise successful business to fail. Having a good partnership agreement is important to ensuring that the overall partnership succeeds.
Several key issues should be addressed when creating a partnership agreement.
The partnership’s legal name should be clearly defined within the partnership agreement.
One of the key issues that a partnership agreement should address is each partner’s rights and responsibilities. If a partner is going to be active in managing the day-to-day business of the partnership, that duty should be addressed in the agreement.
Issues that may arise during the partnership and their resolution should be spelled out. For example, some issues that could be addressed are who is in charge of bookkeeping, how will employees be hired, fired, or disciplined, and how the business will be run on a day-to-day basis.
The partnership agreement should address whether individual partners have the right to legally bind the partnership or whether a group decision must be made before the partnership can be held liable for debts or obligations. Otherwise, a partner may be able to contractually bind the partnership for things such as services, goods, and other obligations.
Contributing Capital / Profits and Losses
A partnership agreement should also address the amount of contributing capital each partner is required to make to enter the partnership. While the percentage of ownership is usually based on the amount of contributing capital, the percentage of ownership should be addressed. The agreement should also outline the manner in which profits and losses will be attributed to each partner.
Buy-In and Buy-Out
A good partnership agreement provides for the eventualities of a partner dying, becoming disabled, or otherwise wishing to leave the partnership. Buy-out provisions should be specifically outlined. If the partnership wishes to add a new partner, procedures for doing so should be addressed as well.
Partnership Agreement Design Issues
A good partnership agreement allows for the discussion of key issues ahead of time. Some issues that should be discussed prior to beginning a partnership are how partners are to balance their professional and personal lives, the amount of time that needs to be dedicated to the partnership and clearly defined expectations and routines
A thorough discussion regarding business and personal needs before entering a partnership agreement will help the partners to:
- Understand the implications of a partnership agreement
- Help partners to define responsibilities and duties in a realistic fashion
- Allow the partners to understand each other’s wants, needs, desires for the partnership and themselves
- Assist in uncovering and resolve potential partnership issues before they occur
- Create a solid agreement that the partners can easily agree to
A good partnership agreement is essential for the smooth management of a business partnership. Issues that could arise should be addressed within the agreement, such as partnership responsibilities, management duties, and how partners can buy in or buy out of the partnership. A good partnership agreement ensures that guidelines and resolution procedures exist to assist the partnership when issues arise in the future.