Details of a Partnership Agreement

By Phil M. Fowler

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.

Authority

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.

Finances

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.

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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.

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Key Sections of a Partnership Agreement
 

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Canceling a Partnership Agreement

You may end a partnership agreement for any reason including disagreements among the partners, or the need for a different type of business structure, such as a limited liability company, because of growth. Once you've decided to cancel a partnership agreement, you must take steps to limit your personal liability for the partnership's debts and the actions of your former partners.

Importance of Partnership Agreement

A legal partnership is formed automatically whenever two or more parties -- either individuals or organizations -- agree to do business together and share profits and losses. Partnerships are governed by state law, and these laws vary somewhat from state to state. You don't need to register your partnership with the state government for partnership law to apply.

How to Sell a General Partnership Business

A general partnership is an extension of the partners; it is not a business that is a distinct entity separate from its owners. This means the partners generally have equal control of the business and are personally liable for all of the business’s debts. Also, because a partnership is not a separate, transferable entity, you cannot sell the business. You can only sell the business’s assets.

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