Creating a Partnership Agreement
Any time two or more people join together to form a business enterprise, they should also set expectations for responsibilities and obligations for the partners. Partnership agreements provide a good way to set out the methods the partners will use to resolve disputes, divide profits and losses, terminate the partnership, add other partners and settle other events that may arise during the course of the partnership. Incidentally, a partnership agreement only binds the parties in the partnership, not third parties who do business with the partnership.
General Partnerships and Limited Partnerships
Partnerships can be formed as either general partnerships or limited partnerships. In a general partnership, two or more people agree that they will start a business for profit, run it together and share equally in the profits and losses.
A limited partnership is an agreement between at least one person – the general partner (or partners) – and a limited partner (or partners) to form a limited partnership. Limited partners usually contribute money or other resources to the partnership but cannot be involved in management of the partnership. As long as limited partners remain in the background, they are entitled to limited liability protection and, unlike general partners in a limited partnership, are only on the hook for losses up to the amount of their capital contribution to the partnership.
Drafting a Partnership Agreement
Partnership agreements should generally be in writing to clarify the obligations and interests of the parties. Of course, general contract principles will apply to the agreement. Limited partnership agreements are required by statute to be in writing. Partnership agreements should describe the terms of the following:
- Capital contributions of each partner
- Terms of return of capital contribution
- Length and purpose of the partnership
- Terms upon liquidation or dissolution of the partnership
- Management of the partnership and indemnification of managing partners
- Rights and powers of the partners
- Other terms for handling events that may arise during the partnership
Partnership agreements may be simple or extremely complex documents. While the idea of forming a partnership and starting a business may be tempting, many business partnerships would benefit by setting the terms and the expectations of the arrangements in writing to avoid future disputes and resolve any misunderstandings about the partnership if they exist.
The Bounds of a Partnership Agreement
Partnership agreements are generally an inexpensive and easy way to resolve questions and disputes that may arise during the course of the business relationship. But the partnership agreement cannot cover every circumstance. For instance, a partnership agreement must comply with state and federal law. Partnership agreements cannot create terms that attempt to absolve the partnership or partners of contract obligations. This is especially important where, without the knowledge or agreement of the other partners, one partner enters into a contract with a third party that binds the partnership.
While partnership agreements may require time and energy to reach understanding between the partners, this work at the beginning of a business relationship can save a partnership or ease its dissolution in the end. Contact a skilled business attorney for help.
Preparing to Meet With Your Business Law Attorney
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