Do You Need a Partnership Agreement?

When setting up either a general partnership or a limited liability partnership, drafting a partnership agreement is a must. While it is legally possible to create a business partnership without a partnership agreement, doing so is risky and can lead to problems between partners down the road.

Business law will tell you that a well-drafted partnership agreement should address in detail all elements of the business, including the features of the business relationship between the partners.

While a range of partnership agreement templates can be found online by a quick search, a business attorney can also be a useful resource in helping to draft this agreement.

Investment Amount and Division of Labor

The first and probably most important items to include in a partnership agreement are the individual investment amounts and the division of labor between partners. Investment in a business is not always monetary – an investment can include providing the building or other real property for the business, as well as specialized equipment for the business. It is important to itemize these types of investments in the partnership agreement.

The next step is to determine which of the partners will take on the management responsibility for the business. It may well be that the partner who invests the most does not, in fact, want to have an active role in managing the business. The partners might also decide to base the control of the partnership on the amount invested, or they may want to divide control equally, giving each partner equal voting power.

Determining the roles that each business partner will play in the business is extremely important, as the success of a business often depends on its management. Memorializing this management structure in the partnership agreement is vital.

Profit-Sharing and Financial Management

Other important elements of a partnership agreement include profit sharing and financial management. Everyone involved in the business will hope to turn a profit, but the profits may be paid out in a variety of ways. For instance, the partners may decide to invest a set percentage of the profits back into the business.

Another aspect of profit-sharing is determining if the managing partners will receive a salary. Deciding how to manage the finances of the business is equally important. The partners will need to choose a bank in which to open the business’s account, whether the business will have a line of credit, and which partners should have signing power for the business’s finances.

Managing Disagreements Among Partners

Other areas of business that may be covered in the partnership agreement include how to manage any disagreements, as well as how to deal with a partner who wants out of the business. While partnerships are often started by friends, disagreements are natural in any relationship, and it can be helpful to determine how the partners will work out these disagreements as they arise.

Many times a neutral mediator can be a good way to resolve issues. Further, if a partner decides down the road that he or she wants out of the business, it’s a good idea to state in writing how such a situation will be handled. The partnership agreement can provide details on the buy-out process, taking into account each partner’s initial investment.

Properly creating a business partnership can lead a business down the path to success. Having a partnership agreement that maps out all aspects of the partnership is an essential component of the process. For those unsure of how to begin, or simply want a “legal eye” to look over the draft of a partnership agreement, contact an experienced business attorney for help.