What is a Partnership Agreement?
A partnership is an agreement between two or more parties to establish and operate a business, including each partner’s share in responsibilities, profits, or losses of the partnership. The benefits of a partnership include having an accessible entity to quickly establish collaboration between partners, favorable tax treatment of partnership income only being taxed once as individual income of the partners (as a pass-through entity), and more flexibility when compared to corporations. The capital contribution of a partner in a partnership can be in the form of cash, real or personal property, or services.
In relation to a partnership, a Partnership Agreement is an essential contract in order to establish the conduct and affairs between the partners. A written Partnership Agreement helps ensure that your interests, responsibilities, and affairs in the partnership are protected, and are harmonious with those of your partners. A Partnership Agreement can also help define how partnership decisions are to be made, the method of managing the partnership, and how disputes should be resolved should there be any disagreement.
Why do you need to use a Partnership Agreement?
In the absence of a Partnership Agreement, a State’s partnership rules and statutes would apply, and this may not be ideal for your situation. For example, your partnership may automatically be subjected to dissolution should one of your partners leave or pass away. Secondly, your State rules may also govern the division of profits and debts of your partnership in the absence of an agreement, which may turn out to be unfair for partners who have contributed more capital or effort in the partnership.
A Partnership Agreement helps avoid automatic resort to State Partnership laws, which gives you the flexibility to define and protect your rights and responsibilities as a partner. It would also help alleviate disputes between the involved partners since the contents of oral partnership agreements may be too difficult to prove or ascertain.
When do you need to use a Partnership Agreement?
While Partnership Agreements are not necessarily required to be reduced to writing, however, it would best not to skip drafting and executing a formal agreement for your partnership. Imagine running into a situation where you provide most of the capital or do most of the work, and yet you only receive an equal share of the partnership profits in the absence of proof that you were actually meant to receive more. A Partnership Agreement can help avoid such a situation and reduce the variables and unknowns when you partner with other individuals or entities in relation to a business.
What are the most common mistakes to avoid?
Sometimes, it would be tempting to skip a written Partnership Agreement (or to enter into one with informal provisions) when forming a partnership simply because you “trust” your relative or childhood friend partner – however, a legal conflict can quickly change and escalate the complexion of your disagreement. Common conflicts include when one partner becomes dissatisfied with bearing a bigger weight of the responsibilities, or if there is simply an incompatibility in the personalities of the partners.
Of course contractually speaking, major mistakes would involve failing to properly define or include any of the following: 1. The contributions of each partner; 2. The partnership interest of each partner; 3. The voting and mechanism needed to implement partnership decisions (especially if there is as dispute); 4. Provisions relating to how a partner can voluntarily leave or be forced out of a partnership, and how a partnership can be dissolved.
Are there any deadlines or times for when this form is needed?
It would be ideal to have a written Partnership Agreement before the commencement of the Partnership – oral contracts are almost impossible to prove because of their very nature.
What are the main things that go on this form?
In general, the main things that can be found in a Partnership Agreement include the capital contribution of the partners, the division of labor and responsibilities between them, the share of the partners in the profits or losses of the partnership, and provisions relating to the management of the partnership. Here are some of the essential requirements:
A Partnership Agreement should necessarily contain the names and details of its partners.
The name, purpose, place of business, governing State, and commencement of the partnership should also be clearly indicated.
A Partnership Agreement should provide the initial capital contributions of the partners, and also their agreed upon ownership interest.
A Partnership Agreement should also indicate the mechanism by which the partners would share in the profits or losses of the partnership (whether equally, on the basis of capital contribution, on the basis of ownership interest, or on the basis of some fixed percentage).
A Partnership Agreement should contain a section concerning the management of the partnership, including how partnership decisions are arrived at, the process and weighing of each partner’s vote in relation to their interests, and if a managing partner would be appointed.
Other important stipulations in the Agreement would relate to how a partner can voluntarily leave or be expelled from the partnership, books/audit/and accounting procedures of the partnership, and also terms in relation to the dissolution of a partnership and its corresponding effects.
Do I need to use a lawyer, accountant or notary to help me?
Consulting a lawyer, accountant, or notary is not an essential requirement for a Partnership Agreement.
What is the easiest way to create a Partnership Agreement?
Using an easily fillable and intelligent legal template is the best way to create a Partnership Agreement, considering the complexity and multifactorial elements that comprise a partnership agreement. On your own, it would be very easy to make mistakes or miss important stipulations.
Why use our Partnership Agreement generator?
Our intuitive legal template form at Form Pros will help you instantly generate a customized Partnership Agreement for your business. All you would need to do is to answer a few simple questions in relation to your intended partnership while our smart template automatically generates your Partnership Agreement.
This is certainly easier and a lot more convenient as compared to the risk of drafting the agreement on your own, or even hiring an expensive lawyer.