The Benefits of a Partnership Agreement

In a written partnership agreement, you and the other partners can address authority, management and control of the business, capital contributions, profit and loss allocation, and more.

by Rebecca Berlin

If you co-own a business with one or more other people and you have not formed the business as a corporation, limited liability company, or some other business form, your business is a partnership. You can have a partnership without a written agreement, but in that case state law will determine your rights and obligations. By making a written partnership agreement, you and the other partners can spell out how your partnership will operate. Items that you might address in a partnership agreement are authority, management and control of the business, capital contributions and methods of funding the business, profit and loss allocation, salaries of partners, buyouts, and admissions of new partners.

Under most state laws it is usually assumed that all partners will share control over the business equally. Furthermore, any partner would have the authority to obligate the business and the other partners. In a partnership agreement, you can state which partners are responsible for what activities. If one partner will manage the business, you can state that in the agreement. If one partner will be in charge of purchasing and another in charge of marketing, your partnership agreement can spell that out. You may also want to specify if the partners' voting rights in the business are equal for each partner or if it depends on how much each partner contributes to the business.

You can also specify in your partnership agreement how profits and losses will be allocated among the partners. Will they be divided equally among the number of partners or in proportion to each partner's capital contribution?

If some of the partners will be working in the business and others will not, you will probably want to indicate what salaries will be paid to whom. Without a partnership agreement, the assumption is that all partners are working in the business and that none are entitled to salaries. This may seem unfair to partners if some contribute significantly more effort to running the business than others.

You may want to address capital contributions in your partnership agreement as well. If additional capital is required, must everyone contribute it equally? How will an unequal contribution affect other aspects of the partnership like control and distributions? You may consider taking in additional funds in the forms of loans from one or more partners as well.

A partnership agreement can also be used to address the eventuality that a partner will need to be bought out. You may want to address the reasons or situations that will allow the partners to remove a partner, such as incapacity of that partner. You can also specify a method for determining the value of a departing partner's share in order to avoid bickering over the price of a buyout.

You may want to decide on a process for admitting new partners to the partnership. The need to add a new partner to the business may develop at some point in the future. You can specify how much agreement among the current partners is required to take this step. You may specify 51% majority or two-thirds majority or something along those lines. Again, it is important to know, does each partner have an equal vote or are voting rights proportional to capital contributions?

A written partnership agreement is essential if you want to address these issues in your business. If you do not have a written partnership agreement, you will be stuck with the provisions that your state's laws dictate. Contact an attorney who practices business law to represent you in drafting your partnership agreement.

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