Partnerships remain one of the most straightforward and easiest business structures available to partners who want to work together to make their business a success. Partnerships require minimal paperwork and bureaucracy, and they rarely require public filings. Still, formation is an important step for partnerships, just like it would be for any business. This cannot be done without a well-drafted partnership agreement. If you are looking to start your own partnership, a partnership lawyer can help you draft the best possible partnership agreement for your needs. An attorney from Priori Legal's vetted network can help you decide whether a limited liability partnership, a limited partnership or general partnership is right for your needs and help you draft the necessary documentation quickly.
Understanding Partnership Agreements
When you start a business as a partnership, a partnership agreement governs its operations. A partnership agreement, or partnership contract as it is sometimes called, is simply a legal document that that establishes the terms of the partnership, as well as the roles and responsibilities of the partners. Partnership agreements serve as the governing documents of any registered partnership, and they establish the rights and responsibilities of each partner, as well as the rules on how the business should be run on a daily basis or in the event of a business crisis, such as the death of a partner or dissolution of the partnership.
While most partnership agreements will be fairly similar and should require the same types of clauses and provisions, there will be some variation depending on the type of partnership. There are three basic types of partnerships available to small businesses in most states in the U.S.:
General Partnership (GP). General partnerships make up the majority of partnerships in the U.S., as they are the simplest type of partnership available. In general partnerships, each partner is involved in the day-to-day management of the business and share in the unlimited liability agreed to under this structure.
Limited Partnership (LP). Like a general partnership, general partners in limited partnerships run the business and take on unlimited liability. Unlike general partnerships, however, limited partnerships can have “silent” limited partners who are not involved in the operations of the business and have liability limited to the amount of their investment.
Limited Liability Partnership (LLP). Limited liability partnerships are only available in some states, and most states restrict these types of partnerships to certain types of undertakings. LLPs operate like GPs, but all partners have limited liability.
Each type of partnership has its own advantages and disadvantages, and every partnership agreement will have very different needs, so it may help to discuss your options with a partnership lawyer.
Uniform Partnership Act
Not all partnerships operate under partnership agreements. Some simply operate under an oral agreement. These partnerships are governed by state law and the Uniform Partnership Act. The Uniform Partnership Act defines defaults applied by the states to operations and disputes involving partnerships. While strictly speaking there is nothing wrong with operating according to the Uniform Partnership Act alone, conducting business without the protection of a partnership agreement often leads to unexpected, even costly, outcomes for businesses. It is always best to ensure that you have full control over how your business operates by using a partnership agreement.
Key Terms and Provisions in Partnership Agreements
Although every partnership agreement will differ slightly, all partnership agreements must address certain issues through the following key terms and provisions.
Name. The first clause in any partnership agreement must name the business and in some cases must be accompanied by a request to file a “Doing Business As” or fictitious name.
Ownership Percentages. All ownership allocation must be clearly defined.
Capital Contributions. It is important to not only establish what contributions are expected of each party when starting the business, but also who will be obligated to contribute further capital at later stages and under which circumstances.
Profit and Loss Allocations. While most profits and losses are allocated according to ownership percentage, this is not always true, especially if one partner does more in terms of management and is not given a salary. All profits and losses must be clearly attributed.
Distributions. These provisions clearly establish when profits of the business can be distributed to the partners, and which partners, if any, earn a salary.
Partner Authority. Unless otherwise stipulated, all partners have equal and unlimited authority to commit the business as they see fit. This power can be limited in this clause or require joint authority for large decisions.
Management. This section generally assigns major management duties of the partners, especially vital procedures such as accounting.
New Partners. This clause details the procedure to add new partners.
Death/ Disability. This clause defines what happens to the partnership after a partner dies or is incapacitated, and, in the case that the partnership continues to exist, defines the authority of the beneficiaries of the partner who left.
Dissolution. This clause defines situations under which the business will be dissolved, as well as exit strategies for any single partner who wishes to leave.
Dispute Resolution. Even the best partnerships sometimes experience disputes. This clause explains the procedures for resolving such conflicts.
Registering a Partnership
In most states, partnerships must be registered. Exactly how this is done will depend on where your business forms and under which type of partnership. In many states, general partnerships must only be registered at the county level where you plant to operate, while LPs and LLPs need to register with the Secretary of State. Still, the exact process varies dramatically depending on where you choose to complete formation, so make sure to check with a partnership lawyer in your area about the exact process that will need to be followed.
Are partnership agreements documents that will endure even after a partner dies?
They can be. It depends on how you write your partnership agreement. Without a death or disability clause that provides for succession plans in the event that a partner can no longer participate in the business (or if there is no formal partnership agreement), the partnership and all governing documents dissolve automatically.
Does my partnership really need to have a partnership agreement?
Yes. No matter how small your business, few your partners, or similar to the terms dictated by the Uniform Partnership Act, every partnership should really be governed by a partnership agreement. The partnership agreement dictates how your business will operate, so you can avoid costly, distracting disagreements later.