Partnership Agreement

What is a partnership agreement?

A partnership agreement is a contract between two or more individuals who would like to manage and operate a business together to make a profit. Each partner shares a portion of the partnership's profits and losses, and each partner is personally liable for the debt and obligations of the partnership.

What are the types of partnerships?

There are two different kinds of partnerships that can be formed. The most common type of partnership is the general partnership. In a general partnership, all business partners have total liability, participate in managing the business, and have the ability to agree to business contracts and loans on behalf of the business. Ownership interests (i.e., how much of the business each partner owns) and profits in a general partnership are usually split evenly between the partners.

The other form of partnership is the limited partnership. Limited partnerships have at least one general partner who controls the business' day to day operations and is personally responsible for the debt of the business, as well as one or more passive partners who are known as limited partners. Limited partners contribute investment money to the business, but have minimal control over daily business decisions and operations. Limited partnerships are most often set up by companies that invest money in other businesses or real estate. In exchange for ceding management power and control, a limited partner's personal liability is solely limited to the amount they invested in the business. The limited partner's investment can be used to pay off partnership debts, but their personal assets cannot be touched to pay off the debts of the business.

What is the difference between a partnership and a limited liability company (LLC)?

When two or more people enter into a business, they form a partnership by default without needing to file any formal paperwork or have a written agreement. By contrast, establishing an LLC involves business owners filing formal articles of organization with their state's LLC filing office, as well as complying with other state filing requirements.

Another major difference between these two business structures is that partners in a partnership are personally liable for any business debts of the partnership. This means that any creditors to whom the partnership owes money may go after all the partner's personal assets. Members of an LLC are not personally liable for the company's debts and liabilities.

Is it mandatory to have a partnership agreement?

No, it is not mandatory to have a partnership agreement to start a legal business partnership. There are no formal requirements to create a general partnership, which means that it is not necessary for anything to be put down in writing for the partnership to form.

Though there is no requirement for a written partnership agreement, it is highly advisable that one be created. This document acts as a critical foundational document for running a new business and serves to set the business up for success by ensuring clear communication and defined responsibilities for all the partners.

What is a "capital contribution"?

A capital contribution is the money, services, property, and other resources that are initially contributed to the partnership by each of the partners.

What is an "ownership interest"?

The ownership interest is the percent of the partnership's assets, earnings, and other value owned by each partner.

What must a partnership agreement contain?

A valid partnership agreement must contain at least the following mandatory clauses:

• Partnership name: This is the legal name under which the Partnership will do business.
• Purpose of the partnership: The document includes a brief description of the business that the partnership will conduct.
• Partner information: The agreement has all the legal names and addresses of all the partners currently involved in the partnership.
• Capital contributions: There is a clause describing the cash, property, services, and other resources initially contributed to the partnership by each of the partners.
• Ownership interest: This describes the percent of the partnership owned by each of the partners.
• Profit/Loss distribution: The agreement outlines how the profits and losses of the partnership will be distributed between the partners, often based on capital contributions and/or ownership interest, and how often this distribution will take place.
• Management and voting requirements: This is a description of how the partnership will be managed, how voting weight will be determined, and whether unanimous or majority votes will be required to make important decisions about the finances and operations of the partnership.
• Partner addition and withdrawal: These are guidelines for how the partnership will handle the addition of partners, the voluntary withdrawal of partners, and the involuntary withdrawal of partners.
• Partnership dissolution: This outlines the circumstances under which the partnership can be dissolved and a description of how the remaining assets of the partnership will be divided between the partners if the partnership is dissolved.

What are the prerequisites of a partnership agreement?

Before creating and filing a partnership agreement, the partners should select and register the name of the partnership. The name of the business should be unique and comply with any specific requirements in the jurisdiction where the partnership is being registered. The partners should check with the city or county clerk's office to see whether the desired name is already on the list of businesses operating within the jurisdiction.

Who can enter into a partnership agreement?

The primary requirement to enter into a partnership agreement is that the person have the legal capacity to enter into a contract. This means that the person is of legal age, 18 years old or older in most jurisdictions, and has the mental capacity to understand the contract they are signing. Both individual people and legal entities, such as corporations, trusts and estates, LLCs, and other partnerships, can enter into a partnership agreement. Foreign nationals may enter into a partnership agreement as long as they have the appropriate immigration status to allow them to work and engage in business activities in the United States.

Who cannot enter into a partnership agreement?

Minors under the age of 18 years old may not enter into a partnership unless they have been emancipated by a court.

Individuals or entities who are currently engaged in bankruptcy proceedings are often restricted from entering into new partnerships.

What has to be done once the partnership agreement has been written?

Once this document is complete, all the partners should sign and date the document. The document does not need to be notarized or witnessed to be legally binding.

Creating a partnership agreement is just the first step in forming a partnership. After the agreement has been drafted, to register a partnership, the partners must file additional documents depending on the state in which they are located. To learn more, please consult the appropriate state department website in the state where the business is located to determine any additional requirements.

Which laws are applicable to a partnership agreement?

Partnership Agreements are subject to the laws of individual states. There is no one federal law covering the requirements for a Partnership Agreement. This is because each individual state governs the businesses formed within that state.

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