Key Sections of a Partnership Agreement

By John Cromwell

A general partnership is an agreement between two or more people to go into business together. This type of organization is subject to state law and agreements between the owners of the business. In most situations, the partners can decide how they want to operate the business by drafting a partnership agreement, a set of rules governing business operations. If an agreement does not address a particular issue, the laws of the state where the partnership is headquartered will govern how the business is to act in those circumstances. As a result, a partnership agreement can be quite detailed. However, there are some key sections that can be especially important.

A general partnership is an agreement between two or more people to go into business together. This type of organization is subject to state law and agreements between the owners of the business. In most situations, the partners can decide how they want to operate the business by drafting a partnership agreement, a set of rules governing business operations. If an agreement does not address a particular issue, the laws of the state where the partnership is headquartered will govern how the business is to act in those circumstances. As a result, a partnership agreement can be quite detailed. However, there are some key sections that can be especially important.

Partnership Financial Rights

Many partnership agreements address the financial rights and obligations of a partnership. Absent an agreement saying otherwise, it is often assumed with general partnerships that each owner has equal rights and responsibilities. That means each partner has to contribute the same amount of money to the business and each gets an equal share of the partnership’s income and losses. A partnership agreement can establish rules so that a group of partners are required to pay more and receive more of the business’s profits, in comparison to other owners.

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Partner Authority

Unless a partnership agreement says otherwise, in a general partnership all partners have equal authority regarding the day-to-day operations of the business, as well as the ability to enter the partnership into binding contracts. A partnership agreement can limit the authority of individual partners. Limitations may be placed on the authority of individual partners for a host of reasons, ranging from a partner not having the qualifications to make business decisions to a partner not wanting the responsibility of making decisions for the business.

Voting

Another issue is how to approve certain “big picture issues,” such as bringing on a new partner. Larger decisions that require a consensus among all owners generally require a vote. The partnership agreement can identify certain questions that may require a minimum vote tally, ranging from a simple majority to complete agreement among the partners. When reviewing the partnership agreement, it is important to determine what situation needs to be voted on and what vote is required to make that decision.

How to Resolve Disputes

Some disputes between partners may be so significant that an outside party will need to make the decision. Some partnership agreements contain “mediation clauses” that compel partners to find a third-party to review the issue and make a decision for the partnership. The benefit of a mediation clause is that it diminishes the probability of the partnership having to go to court to settle the issue.

Death or Withdrawal of Partner

Absent a provision in the partnership agreement, when a partner dies or withdraws the partnership generally dissolves, with the property being divided amongst the living partners and deceased partner’s estate. However, provisions can be included in a partnership agreement that would allow the partnership to continue while still compensating the departing partner or his estate.

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How to Prepare a Partnership Agreement

References

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General Partnership & the Death of a Partner

A general partnership is an informal business organization created when two or more people decide to start a business together. Partnerships operate under state law, so the effect of the death of a partner may vary depending on where the business is located. However, 38 states have adopted the Uniform Partnership Act, so there is some consistency across the country.

Can a Limited Partner Make Decisions Binding to the Partnership?

A limited partner can have an ownership stake in a limited partnership or a limited liability partnership. Whether a limited partner can make a binding decision for a business depends on the organization he is affiliated with and what the decision is. Both limited partnerships and limited liability partnerships are bound by state law. As a result you may want to review the relevant statutes of your state to determine what rights a limited partner has.

Details of a Partnership Agreement

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.

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