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How to Write a Partnership Agreement


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How to Write a Partnership Agreement

If you and your partners don’t spell out your rights and responsibilities in a written partnership agreement, you’ll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes.

In addition, without a written agreement saying otherwise, your state’s law will control many aspects of your business.

How a partnership agreement helps your business

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business.

You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves and other important guidelines.

Uniform partnership act

Each state (with the exception of Louisiana) has its own laws governing partnerships, contained in what’s usually called “The Uniform Partnership Act” or “The Revised Uniform Partnership Act” — or, sometimes, the “UPA” or the “Revised UPA.”

These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnership’s life unless you set out different rules in a written partnership agreement.

Don’t be tempted to leave the terms of your partnership up to these state laws. Because they were designed as one-size-fits-all fallback rules, they may not be helpful in your particular situation.

It’s much better to put your agreement into a document that specifically sets out the points you and your partners have agreed on.

What to include in your partnership agreement

Here’s a list of the major areas that most partnership agreements cover. You and your partners-to-be should consider these issues before you put the terms in writing:

• Name of the partnership. One of the first things you must do is agree on a name for your partnership. You can use your own last names, such as Smith & Wesson, or you can adopt and register a fictitious business name, such as Westside Home Repairs. If you choose a fictitious name, you must make sure that the name isn’t already in use.

• Contributions to the partnership. It’s critical that you and your partners work out and record who’s going to contribute cash, property or services to the business before it opens — and what ownership percentage each partner will have. Disagreements over contributions have doomed many promising businesses.

• Allocation of profits, losses and draws. Will profits and losses be allocated in proportion to a partner’s percentage interest in the business? And will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? You and your partners may have different ideas about how the money should be divided up and distributed, and each of you will have different financial needs, so this is an area to which you should pay particular attention.

• Partners’ authority. Without an agreement to the contrary, any partner can bind the partnership without the consent of the other partners. If you want one or all of the partners to obtain the others’ consent before binding the partnership, you must make this clear in your partnership agreement.

• Partnership decision-making. Although there’s no magic formula or language for divvying up decisions among partners, you’ll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision. Or if that leaves you feeling fettered, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these when setting up the decision-making process for your business.

• Management duties. You might not want to make ironclad rules about every management detail, but you’d be wise to work out some guidelines in advance. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure you’ve got everything covered.

• Admitting new partners. Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.

• Withdrawal or death of a partner. At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should set up a reasonable buyout scheme in your partnership agreement. To learn more about this issue, read Plan for changes in partnership ownership with buy-sell provisions.

• Resolving disputes. If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.

• Term of the Partnership Agreement: Commencement and termination dates must be agreed upon.

• Capital or the set-up investment. Parties decide upon having a separate Capital Account and proportionate percentages per partner.

• Profit and Loss. The Income Account bears the profit and loss of the partnership. In writing, document which partner bears what percentage of income and loss.

• Salaries or Drawings. In a partnership, income is received by taking a draw against the income of partnership. The Partnership Agreement sets out specific amounts or percentage that may be drawn.

• Interest. Usually, no interest is charged on Capital Account.

• Management Duties, Requirements or Restrictions. This section of the Partnership Agreement sets out what each partner's responsibilities are. Inclusions might be: time devoted to the business, and who can incur partnership debt

• Bank Signatory. Who has authority to conduct business with the bank, and who has permission to write and sign checks?

• Partnership Books. Books should be maintained at the named principal office and all partners should have total access. You will need to decide how books will be kept; in particular, you should determine your fiscal calendar with starting and ending dates. A specific time needs to be chosen for regular audits of the partnership books.

• Voluntary Termination. Occasionally, one or more partners may want to terminate participation in the Agreement. Spell out the rules of termination. All partners must agree to liquidate liabilities, divide Income Accounts proportionate to signed agreement, and disperse the Capital Account in case of total dissolution of the Partnership Agreement.

• Death. In the event of a partner's death, decisions on right of purchase by the surviving partner(s) or liquidation should be outlined here. If purchase is made, how the deceased partner's percentage is calculated and dispersed is included here.

• Arbitration. This section states how resolution will be made. It's best to set out which jurisdictional court will rule. If anything is missed here it will fall to the American Arbitration Association.

• Execution. After the Partnership Agreement is agreed upon, it must be signed by all parties, preferably notarized, and a copy given to each party.

Writing a Partnership Agreement protects the Partnership and its assets, giving each partner a definitive role to follow.

The agreement entered into is legally binding and should be reviewed by a qualified attorney.

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