Overview of a Partnership Agreement
What is a partnership agreement?
A Partnership Agreement is a contract between two or more individuals or businesses to manage and operate the business together by sharing responsibilities and profits.
A Partnership Agreement also sets out the powers and duties of each partner, and most importantly how the profits and losses are shared among them.
It also sets out the basic rules on which the partnership operates. For e.g.: how accounts are prepared or how funds can be withdrawn.
What should a partnership agreement include?
These are the important things to include in a partnership agreement.
Details about the partners: This includes the types of partners and the capital contributions of each partner.
Contributions of each partner: It’s critical that you and your partners work out and record who’s going to contribute cash, property, or services to the business before it opens — and what ownership percentage each partner will have.
The length of partnership: Although the duration of a business partnership is hard to define in the agreement, it is very important to discuss and include it to show the clear intent of doing business together as a single entity.
Name and nature of the business: Some partnerships take the name of their partners, while others use an independent business name. it is crucial to decide on a partnership name before starting a partnership.
Division of profit and loss: Your Partnership Agreement should set out how the profits and losses will be allocated.
Details of options for outgoing partners: it is important to discuss exit strategies to be prepared for future scenarios (e.g., when not all the partners are in agreement about the business). Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.
Banking and monetary restrictions of the partnership: This includes designating whether partners have the power to borrow money on behalf of the partnership.
Partner’s authority and decision-making: It is very important to decide partners’ authority and decision-making power while drafting the partnership agreement in order to avoid any dispute in the future.
What is the purpose of a business partnership agreement?
A partnership agreement forms the foundation of the business partnership by protecting and aligning the interests of the partners. The main purpose of a business partnership agreement are:
- Partnership agreement clearly Partners and percentage of ownership.
- Some partnerships are general partnerships, with partners sharing responsibilities and liabilities. Other agreements are limited partnerships, with one or more partners acting as an investor with limited or no activity in the business and little or no liability.
- An effective partnership agreement describes how the business can be dissolved or a partnership transferred.
- Partnership agreements can lay out who owns assets, such as the business name, customer list, or recipes if the business is dissolved.
How do you end a business partnership?
Partnerships fail or are dissolved for a variety of reasons. A Dissolution of Partnership Deed helps to properly wind up the partnership and divide any assets or liabilities. It basically contains the terms under which the partnership is terminated. A clearly worded dissolution agreement can help avoid misunderstandings. However, if misunderstandings occur, partners may enforce their rights through litigation, filing suit in the proper court within the state where the partnership was created.
A partnership enables a sharing of responsibility and allows a business to better raise funds. When operating as a partnership, it is crucial to put into place a Partnership Agreement, regardless of whether you and your partners are used to a more informal style of collaboration. Unlike a company, a partnership is not a separate legal entity. It is thus important to ensure that your partners are all aware of their duties and obligations, as well as a potential liability.
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Along with this document, make sure you see these other templates in our library:
- Non-Disclosure Agreement (NDA)
- Terms and Conditions for Online Marketplace
- SaaS Agreement
- Employment Contract
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