Importance of Partnership Agreement

By David Carnes

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.

Types of Partnerships

Two traditional types of partnerships are possible -- general partnerships and limited partnerships. In a general partnership, all partners face unlimited personal liability for business debts. In a limited partnership, some partners act as passive investors -- they don't take part in day-to-day business decisions, and their liability for partnership debts is limited to the amount they invested. Limited partnerships are formed through registration with the state government. In recent decades, states have also created other types of partnerships, such as limited liability partnerships (LLPs) and limited liability companies (LLCs). These types of partnerships offer some form of limited liability to all partners.

Legal Status of Partnership Agreements

Forming a partnership does not legally require execution of a partnership agreement. If you don't execute an agreement, however, the default rules of state partnership law will govern your partnership. Default rules are laws that apply only if there are no contrary provisions in a partnership agreement. State partnership laws also contain mandatory provisions that apply regardless of the terms of a partnership agreement. For example, partnership law does not allow a limited partner to take an active role in managing the business, and any contrary provision in a partnership agreement cannot be enforced.

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Advantages

A partnership agreement can override state default rules in a manner that suits the partnership's business needs. For example, a default rule may state that all partners are entitled to profits in proportion to their investment in the partnership. A partnership agreement, however, may allow a partner with particularly valuable expertise to receive a greater proportion of profits than he would receive under state default rules. Although partnerships generally dissolve if even one partner leaves or dies, a partnership agreement may clarify how a partner may leave the partnership without dissolving it. For example, it may include buyout provisions that apply whenever a partner wishes to withdraw from the partnership.

Contents

A comprehensive partnership agreement should include provisions governing the departure of partners, the addition of new partners, the allocation of profits and losses among the partners, and partner capital contributions. It should list the responsibilities and voting rights of each partner and should state which partners have the authority to legally bind the partnership with their signatures. It should also clarify the partnership's business goals and state how disputes are to be resolved (through arbitration, for example). The agreement should be broken into sections based on topic. One section might deal with partnership governance, for example, while another might be devoted to changes in membership.

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Details of a Partnership Agreement

References

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How to Convert a Sole Proprietorship to a Partnership in Maryland

In many cases, a business gets off the ground with the work of a single owner operating a sole proprietorship. As the company grows and becomes more profitable, additional owners often come into the picture, which can necessitate a restructuring of the business. In Maryland, new business registrations are handled by the Maryland Department of Assessments and Taxation. However, by law, neither sole proprietorships nor partnerships are required to register. Instead, the conversion process is handled through internal partnership agreements and by amending any existing licenses to include the names of the new owners.

South Carolina LLP Laws

South Carolina law regulates how a Limited Liability Partnership, or LLP, may form, operate, and ultimately dissolve. Unlike limited partnerships or general partnerships where one or more partners are personally liable for the debts of the business, an LLP limits liability for all partners. Each partner may participate in the management of the business, and receive a portion of the profits.

Steps for Dissolving a Partnership in South Carolina

Knowing the process for ending a general partnership can help partners effectively wrap up business affairs when it comes time. In South Carolina, the filing of dissolution paperwork with the state is generally not required. However, it is a good idea for partners to execute a written agreement regarding distribution of company assets and payment of creditors in the event of dissolution. Additional steps, including cancellation of professional licenses and permits as well as satisfaction of tax liabilities, may also be involved.

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