If you are currently involved in a partnership, or are thinking about starting up a business as a partnership, you should really take the time to think about how to write a partnership agreement. Without a set of rules in place, even minor disputes could escalate into major problems that could end up dissolving your partnership. Lastly, if you do not have a partnership agreement in place, your partnership may be governed by default rules set out by the state.
What a Partnership Agreement Can Do for Your Business
In its most basic form, a partnership agreement will give you a firm understanding of your business relationship that you have with your partners in your business. The partnership agreement will spell out how the business profits will be divided amongst the partners, the rights and responsibilities of the partners, the procedures to take when a partner leaves the business, and many other important rules and guidelines.
Remember that if you do not have a partnership agreement in place, your partnership will most likely be governed by default rules that are put in place by your state. Generally speaking, these rules are known as "The Uniform Partnership Act," or "The Revised Uniform Partnership Act." Default rules are like a "one-size-fits-all" shoe and they probably won't work that well for your partnership.
What you Should Have in your Partnership Agreement
Although there may be other items that you want to include in your partnership agreement, here is a list of some of the most common and prominent items found in partnership agreements:
1. The name of your partnership: If you have not done so already, perhaps one of the first things that you and your partners need to sit down and agree on is the name of the partnership. Many partnerships often take the names of their partners, however you can also choose the option of making a fictitious business name. If you decide to use a fictitious business name you must make sure that the name is available for use and has not already been taken.
2. The respective contributions of the partners: When a partnership agreement is written it is important that all the partners get together and agree on who will be making what
3. How the profits, losses and draws will be allocated: Your ownership agreement should set out how the profits and losses will be allocated. Another question that should be answered is whether every partner will be able to take a regular "draw," a withdrawal from his or her allocated profits, each year, or whether the partners can take their entire allocated profits.
4. The authority of the partners: Without an agreement that is contrary, any decision of a partner can be binding on the entire partnership, even without getting the other partners to agree. If you want to make sure that no one partner can incur debt the for entire partnership without the agreement of all the other partners, you need to be sure to include this in your partnership agreement.
5. Business decision-making powers: If you do not want one partner to be able to make important business decisions without consent, then you need to make sure to spell out the business making powers of each partner. One popular method is to require a unanimous vote of all the partners for all important business decisions, but still allowing individual partners to make minor business decisions without a formal vote. However, if you decide to take such an approach, you need to be sure to spell out what constitutes an "important" business decision and what constitutes "minor" business decisions.
6. Managing: Although it is probably not a great idea to spell out every detail of management in a partnership agreement it would probably be a good idea to assign important management duties such as who will be keeping the books for the business.
7. How to bring in new partners: There may come a time in your business when you want to bring in new partners. If you can agree on this process at the outset, it will probably be much easier when the time rolls around.
8. How to deal with the withdrawal or death of a partner: Many partnerships have fallen apart when on partner decides to leave, becomes disabled or dies. You should be sure to have a buyout agreement included in your partnership agreement that deals with such situations.
9. How to resolve disputes: If you spell out how you will deal with deadlocked disputes at the outset, you can save a lot of money in the future. For example, instead of allowing the partners to go to court, you could require that arbitration or mediation is used first.
Get a Free Initial Legal Review of Your Partnership Agreement
Ultimately, the partners involved in a partnership will need to decide on the goals and structure of their business. But the right attorney can help guide the process and help you avoid any misunderstandings or legal mistakes. Contact a small business attorney for a free initial case review to discuss your partnership and learn how they can help you make the right choices for your business.