Writing a Partnership Agreement

Posted: May 7, 2009 1:41 PM
Updated: May 7, 2009 1:41 PM

Real Small Business: Building Your Business

From the Editors of Real Small Business

When you're in a partnership, it's highly advisable to have a formal, written partnership agreement. While it is not required by law, a partnership agreement can give you a framework for defining each partner's obligations, and settling the conflicts, disagreements and other difficult-to-resolve issues that naturally occur in nearly every business relationship. Ultimately, it will help ensure the long-term well-being of your business.
Without a partnership agreement, your business will likely be governed by the Uniform Partnership Act (UPA). Adopted with some variations by nearly every state, the UPA sets the guidelines for partnerships, but allows for little flexibility. This general law does not take into account the unique relationships most partnerships have, and it may not fit your specific business. For example, without a formal agreement, the law may assume that each partner has an equal share of the business, and tax liability would be determined accordingly. Similarly, should one partner leave the business or die, the partnership would have to be dissolved, unless an agreement stipulates otherwise.
Create your written partnership agreement with the assumption that anything that can go wrong with your partnership will. Friction between partners over things such as money, power or ego frequently undo these business relationships. Your partnership agreement should prepare you for all possible "what-if" situations, and set methods for resolving them. You will find that it pays to be extra cautious.
You can save money by drafting your own version of the key parts of your agreement, then taking it to your firm's attorney to be reviewed, clarified, modified and finalized. It is important to have an attorney review the contract, because you want to make sure it complies with the partnership laws of your state. Finally, each partner might want to have his or her own lawyer look it over, since your firm's attorney can't represent the interests of each individual partner.
Below are some of the key areas you will want to cover in your written partnership agreement: Basics
What is the name of the partnership?
What is the purpose of the partnership?
What is the duration of the partnership?
Responsibilities, performance and remuneration
What is each partner's role?
What are each partner's responsibilities within the company, and what level of performance is expected? Are partners expected to make a full-time commitment to the venture, or are business activities permitted?
What will be the income of each partner, and how will profits or losses be distributed?
Contributions
What will each partner be contributing to the partnership in terms of cash, assets, loans, investments, and/or labor?
If a partner loans to company money, what will be the terms or repayment?
Will the partners be expected to make additional contributions to the partnership, and if so, how will that be handled?
Withdrawal of partners/admission of new partners
What guidelines should be followed if one partner wants to leave the partnership? Will partners be allowed to sell their interests in the business to outsiders? On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)? How will new partners be admitted to the partnership?
Buy-out procedures
What guidelines should be followed if one partner wants to retire or leave the partnership? What happens if a partner is incapacitated or dies? Will the partnership take out "key man" life insurance to ensure the surviving partner is able to buy the deceased partner's shares from his/her heirs? Will partners who leave have to sign a non-compete agreement?
Dispute resolution
What methods will be used to settle disputes that can't be otherwise resolved?
What procedures should be used in the event of a tie vote between partners on crucial partnership decisions?
Will you use mediation or binding arbitration?
If disputes can't be resolved, is there a mechanism in place for dissolving the partnership?
Financial arrangements
What banking arrangements will be made for the partnership?
Which partners will have check signing privileges?
Who will be authorized to draw on the partnership's accounts?
How will the books be kept?
Method for dissolving the partnership
When can the partnership be dissolved?
What happens to the partnership if the partners decide they can't work together?
Valuation
What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?