Partnership Agreement Template - Free Download on
SummaryWhat is a Partnership Agreement? A partnership agreement a contract between business partners that details how the business operates and the individual responsibilities and liabilities of each party.
What is a Partnership Agreement?
A partnership agreement a contract between business partners that details how the business operates and the individual responsibilities and liabilities of each party.
When two or more people start a business, they need a partnership agreement. This is a legal contract that dictates how the business operates. These contracts are often very complex. Many businesses attempt to avoid using a partnership agreement, but this can create big problems in the future.
Without an agreement, you are subject to default rules, usually either the Uniform Partnership Act or the Revised Uniform Partnership Act. Default rules may not be enough to govern your business because every partnership is different and has different legal needs. A partnership agreement may also be called:
General Partnership Agreement
Articles of Partnership
Types of Partnership Agreements
There are three basic types of partnership agreements. They are:
General Partnership (GP)
Limited Partnership (LP)
Limited Liability Partnership (LLP)
A GP is for when two or more people start a for-profit business. With a GP, every named partner is equally responsible. An LP portions liability. One partner has unlimited liability while another is only liable for their ownership percentage. An LLP is when partners are only responsible for their own actions. Decide which partnership you want to use before writing your agreement.
When Should You Use a Partnership Agreement?
Anyone who starts a business with a partner needs a partnership agreement. This is true even if you start a business with friend or family. Partnership agreements can settle disputes, divide up profits and much more. If a partner wants to leave your business, the rules for leaving are in the partnership agreement.
There is almost no downside to using a partnership agreement.
When Should You Not Use a Partnership Agreement?
You should almost always use a partnership agreement for your business. The only time to avoid using one is if you and your partner can't agree on terms. In these cases, use default rules. You also shouldn't use a partnership agreement if one partner refuses any liability. This may mean they are not trustworthy and may harm your business. Every business should consider a partnership agreement.
Basic Information Needed in a Partnership Agreement
You must include basic information in your partnership agreement to set the boundaries of your business. This is in addition to the rules for how your business operates. Some of the basic information your agreement needs to include is:
The name of your partnership
The date your partnership takes effect
Length of the partnership
The purpose of your partnership
After this information is recorded, discussions about the partnership terms can begin.
Outlining Your Partnership
A partnership agreement is very detailed. It must cover every area of your business. There are certain elements it must contain. This includes how it runs and what each partner contributes to the business. You and your partners need to discuss and agree on several things.
This determines ownership percentage. The percent each partner owns is based on how much capital they contribute. You also need to discuss what counts as capital. Is it just money, or can it be tangible assets? This section should include what happens if a partner does not contribute and if future contributions are allowed.
Types of Partners
Your partnership may contain different types of partners with different workloads. Some partners are involved in every aspect of the business. Others may only take part financially. Detailing each partner's role is the focus of your agreement.
Distributing profits and losses is an important part of a partnership agreement. This is done in one of two ways. Fixed percent is the most common. Each partner shares a percent of losses and profits. The percentages must total 100 percent when added. Equal share is the other type of distribution. This means partners evenly share both profits and losses. You can also discuss how often partners can receive profits (draws).
Partners should agree on a salary. For new businesses, this may be lower at first. Generally, partners have the same yearly salary. This relates to but is different from profit distribution. This section also includes items like vacations, sick leave, and other benefits or leaves of absence.
Part of your agreement should include tasks necessary to maintain your business. This can include rules for record keeping and where records are kept. The maintenance section can also contain rules for company meetings, such as how many partners counts as a quorum.
You must discuss how the business is managed. Many businesses choose one partner as the manager. Some use a voting system where every partner has a say. There are several systems you can use. Proportional to Contribution voting is where the weight of a partner's vote is tied to their capital contribution. Proportional to Profit Share means voting power is based on profit share distribution. Equal Vote means each vote counts the same.
Many partnerships contain non-disclosure, non-solicitation, and non-competition clauses. This protects your business from disgruntled former partners. Partnership agreements may also restrict the outside behavior of partners. This protects your businesses image.
At some point, a partner may need to withdraw from the agreement. They may do so voluntarily or non-voluntarily. Your partnership agreement needs to explain the terms of withdrawal. This can include a probationary period, how much capital the leaving partner will receive, and if they need to give notice. You should also include rules for the expulsion of a partner.
Your partnership may eventually need to dissolve. There are many reasons for dissolution, such as:
Your agreement may include an end date.
Your business has served its purpose.
A partner has left the business through death, going to jail, being forced out of the business, or voluntarily.
One partner or the entire partnership has gone bankrupt.
Your agreement must contain dissolution terms to decide how assets are divided when the partnership ends.
Every partnership agreement needs a provision for resolving disputes. This is important if you've assigned voting percentages but haven't included a tie breaker rule. Some partnerships give one member, like the CEO, the final say. You can also choose an outside source like mediation or arbitration. Disputes that end in litigation often result in partnership dissolution.
You and your partners need to agree on certain matters of authority. For example, will your business have a credit line? Which partners can sign contracts? What about spending? This section of your agreement should cover these issues.
Death or Disability of a Partner
Most agreements include something called a buy-sell agreement. This allows a partner who has died or become disabled to be bought out of the partnership. It may also be a good idea to include a key person insurance provision in your partnership. This insurance policy can keep your business afloat if a major partner dies.
New Partnership Members
You must agree to the procedure for bringing in a new partner. This can be as simple as a majority vote. You may also outline circumstances where existing partners can veto a new partner. This section allows your business to grow and add new members as needed.
Selling Your Business
A partnership agreement also needs to describe how the business can be sold. This can be done as part of the before mentioned buy-sell agreement. Make sure all partners agree with the details in this section, as selling a business is the cause of many partnership disputes.
How Can I Write a Partnership Agreement?
There are many ways to write a partnership agreement. Basic partnership agreements are usually available online. You can review these documents and make adjustments as necessary. You can also hire an attorney. An attorney will sit down with all partners and help them construct the agreement. If you use a template, you should always have your agreement reviewed by an attorney before signing.
Your agreement usually is not binding unless it is signed and notarized.
Partnership Agreement FAQ
- Is a Partnership Agreement Necessary?
- It is not necessary but recommended. These agreements protect the interests of all partners. They also put your business on solid footing.
Do I Need a Lawyer?
- Not necessarily. A lawyer can help write your agreement but one is not required. Hiring a lawyer makes writing your agreement much easier.
How Long Will My Agreement Last?
- Partnership agreements last as long as you want. This can be for years, decades, or even months. You and your partners will discuss length while writing your agreement.
Does My Agreement Need to Be Complex?
- Your agreement should include any needed information. This does not mean it needs to be complex. The language in an agreement can be simple if it covers the right topics.
Hire a Lawyer to Write Your Partnership Agreement
Writing a partnership agreement can be difficult. They cover a lot of important information necessary for the success of your business. Make writing your partnership agreement easier by hiring an attorney from UpCounsel.
The UpCounsel marketplace has experienced and knowledgeable legal professionals who can easily help you write your partnership agreement. Post your job today and get started writing your partnership agreement with UpCounsel.
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