Although state laws do not require partnership agreements, a partnership agreement can provide a solid legal foundation for your business venture. Even among family and friends, a partnership agreement can provide benefits in the form of clarifying rights, relationships, and responsibilities related to the business venture. Without a partnership agreement, unnecessary disputes will certainly arise as the business operates over time. Friends may turn into enemies over issues that were supposedly decided in a handshake agreement, but were never spelled out in writing. The details of a partnership agreement help avoid conflict by establishing all the important aspects of the business in a written document to which all partners agree.
The term "partner" or "partnership" has important, though often overlooked, legal implications. A partner has legal authority to bind the partnership, including the other partners personally, to legal and financial obligations. Accordingly, a partnership agreement should include any limitations on this general partnership authority. For example, the partners might limit authority to a specific obligation, such as a property lease for the partnership offices.
A partnership agreement should include details relating to the finances of the business. These details include the timing and amount of any capital contributions the partners will be expected to provide. For example, the partnership agreement should specify whether the partners will be required to provide loans or capital contributions to start the business or if the business should ever experience cash shortfalls. Additionally, the partnership agreement should outline how and when the partnership will distribute profits to the partners, or in the case of losses, what partners will cover the losses. All financial arrangements, however standardized or customized they may be, should be in the partnership agreement.
Termination and Buyout
Additional points to cover in a partnership agreement are how and when a partner can get out of the partnership. The agreement should address if a remaining partner or partners have any right or obligation to buy out the departing partner, and if so, at what price. The agreement should also indicate if any partners can assign their partnership interests to third parties, with our without the remaining partners' consents. The partnership agreement should address if the partnership will ever accept new partners, and if so, on what terms. All these issues, as well as any other terms of agreement, need to be spelled out clearly in the written partnership agreement.
Involvement and Competition
A partnership agreement might also include provisions relating to the time and activities of each of the partners. For example, it might be a good idea to include in the partnership agreement a requirement that each partner must dedicate a certain amount of time or attention to the partnership's activities. The partnership agreement might also include any limitations regarding the ability of any partner to participate in a separate business venture that competes in any way with the partnership.