Running a partnership business presents many advantages. Shared responsibilities and capital contribution take the load off one person. However, with additional partners comes the need for ground rules to streamline operations.
Unlike sole proprietorship, where you make all the decisions alone, partnerships require collaboration. You must also decide how much of the business each partner owns, assign them responsibilities, and determine how long the partnership will last, among other factors. A business partnership agreement captures all these aspects. It prevents misunderstandings and offers a reference point during the partnership.
All parties should sign a contract agreeing to the partnership’s terms. The agreement is legally binding, and if there are breaches, you can enforce its terms in court.
Let’s discuss why you need a business partnership agreement.
Who Needs a Business Partnership Agreement and Why?
Any two or more individuals or entities that choose to co-own and run a business together are in a partnership. Such a relationship raises questions about how much of the investment belongs to each party and how to manage business operations.
Some business partners choose to split all assets, profits, and liabilities equally among all partners. Others agree that partners will share profits in proportion to their capital contributions. Yet others apportion benefits according to a partner’s responsibilities at the company. Whatever the case, they need a contract to solidify the relationship and to set the ground rules.
Running such a business without a partnership contract puts the partners at risk of constant disagreements and waste of time spent on resolving disputes. The business partnership contract is a straightforward document to draft once you have agreed with all partners. Below are some typical components of a standard business partnership agreement.
What to Include in a Business Partnership Agreement
Your partnership agreement will differ from that of the next business. However, expect to find the following components.
- Title: The title should clearly indicate that the document is a business partnership agreement. Write it in large, bold font.
- Names of partners: List all those involved in the agreement. Write their legal names and physical addresses. You should also include their contact information.
- Type of partnership: You should state whether yours is a general partnership, limited partnership, limited liability partnership, or another.
- Name of business: As partners, you need a registered “doing business as” (DBA) name.
- Purpose of partnership: Describe the work you do and other legal activities you may engage in to run the business successfully.
- Duration: Business partners must decide how long the partnership will last. Provide the commencement and termination date. Some actions or inactions may result in premature dissolution.
- Capital contributions: Before agreeing, discuss how much of the capital each partner contributes. You will write the amount and the percentage their input constitutes. Allow provisions for additional investment if the need arises.
- Profit and loss allocation: Distributing the proceeds is a sensitive matter. Ensure you allocate percentages fairly and that each party understands the implications. You may distribute profit losses equally among members or based on their business share or role in the company.
- Responsibilities: Assign roles so that everyone knows their duties. It may be necessary to delve into the details of daily tasks and who does them.
- Decision-making: Decide ahead of time who makes what decisions and when it might be necessary to take a vote.
- Salaries: Decide whether partners draw a predetermined wage or if they may only draw their share of the profit during that period.
- Financial Management: The business needs at least one bank account to deposit funds and perform other transactions. Decide beforehand who manages the accounts and when they may require consent from partners to approve a transaction.
- Admission of new partners: Decide if additional partners may join the business and provide the criteria for qualification.
- Exiting the partnership: Make provisions for members who wish to transfer their interest in the company to another party.
- Dissolution of the partnership: Discuss why and how the partnership may dissolve. For instance, all partners may agree to end the partnership, or a partner may become bankrupt. Decide how you will distribute assets and liabilities when the business dissolves.
- Dispute Resolution: Set rules for how you will resolve disputes. Members can agree to begin with mediation before moving on to binding arbitration.
- Governing law: State the regulations that govern the agreement.
- Signatures: Your document should have spaces for every partner to sign.
The contract should clarify that partners owe each other the duty of partnership, including the duty of care, loyalty, good faith, and disclosure. A team member can be liable for breaching their obligations to the partnership.
You may add more sections to capture personal and legal requirements.
Article by
Dena StandleySenior Writer | Experienced Paralegal | 79 Articles
Dena Standley is an experienced paralegal based in Houston, Texas and has over a decade of experience working as a paralegal with trial lawyers and law firms. She is passionate about making legal processes more accessible and helping people understand and navigate complex legal matters with confidence.
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