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WHAT IS A PARTNERSHIP AGREEMENT?

A partnership agreement is a legally binding contract between two or more parties that should clearly control the symbiotic relationship of the parties.  Although a partnership agreement does not have to be in writing for nearly all business purposes a written partnership agreement is a must.

THE THREE TYPES OF PARTNERSHIP

The three types of partnerships are general partnership, limited partnership and limited liability partnership. The type of partnership that the parties choose will govern the specific information that is needed for the partnership agreements.

  • General Partnerships
    A general partnership is the easiest to form in that it does not require the filing of state forms. General partnerships require less money and time to create. They also do not require annual meetings of the partners. This type of partnership is also the one in which a lot of problems arise because some parties chose to start a business without a written agreement which leads to numerous problems in the future. Also in general partnerships, each partner is jointly liable for the debts of the partnership.
  • Limited Partnership
    In a limited partnership, the limited partners are not responsible for the debts of the partnership; only the general partners are liable. The personal assets of the limited partners cannot be used to pay the debts of the partnership. Limited partners are only liable for the amount of their investment in the partnership in most cases.
  • Limited Liability Partnerships
    The major advantage to a limited liability partnership is that the personal asset of the partners cannot be used to satisfy the obligations of the partnership. It does not prevent them from being responsible for their own acts outside of the partnership. Limited liability partnerships are only available to certain parties that provide professional service: i.e.Doctors, Accountants, Lawyers, and other professionals as provided in states’ laws.

WHEN DO YOU NEED A PARTNERSHIP AGREEMENT?

Although it is possible to set up a partnership without a formal written partnership you will need and should have a partnership agreement anytime parties decide to form a partnership.

A partnership agreement is based upon symbiosis in that each partner should, in essence, benefit the other parties to the agreement.  A partnership allows parties to aggregate or pool the resources, talents, funds, and property of the members of the partnership which in turn should produce a profit for all.

Partners in general partnerships are jointly liable for the debts of the partnership. If there is a partner would have created a lot of encumbrances for the partnership, then all will be considered as responsible for resolving the issue or “making good” on the debts and honouring the commitments of the partnership.  A partnership agreement is needed to emphasize this joint liability before the partnership is formed; it is incumbent that each partner is aware of his or her liability up front.

A partnership Agreement serves as the framework and guideline on how the partnership should operate at any given time. Without a partnership agreement, the parties who have maintained a great personal relationship prior to the formation of the partnership may have to resort to protracted litigation to resolve major partnership problems.

WHAT SHOULD BE INCLUDED IN A PARTNERSHIP AGREEMENT?

A partnership agreement can be extensive or it can be concise however there are several elements that must be present in all partnership agreements. These elements are as follows:

  • The agreement must clearly set out the names of all parties as well as set out the type and manner of the financial contribution of each partner.
  • The partnership agreement should explain the allocation of responsibility for work within the partnership. Simply put the agreement must state who is supposed or authorized to perform what duties/work within the partnership.
  • The agreement should state what property will be included in the partnership along with the intended use for the property within the partnership.
  • How profits will be disbursed is a critical element of the partnership. The amount, frequency and percentage of profit disbursal of income must be decided at the onset to prevent conflict, misunderstandings and acrimony within the partnership later on.
  • How the partnership will address tax and accounting matters needs to be defined within the agreement. Included in this requirement is the need for a business bank account and an accountant or bookkeeper. In many small partnerships one of the partners perform these duties but in larger and very business savvy partnerships these functions are usually delegated to an outside entity.
  • Another very important factor that must be resolved before the agreement is formed is how disputes will be addressed and resolved. This requirement is extremely important because even if the partners are relatives or best friends disputes will inevitably arise so it is best for the parties to decide how potential disputes can be resolved before they arise.
  • The partnership agreement should address the manner in which the partnership property will and shall be used by the individual partners. Disputes can and do arise if one partner appears to be taking unfair advantage of the other partners because he or she is utilizing a greater share of the partnership property.
  • All things come to an end eventually so the partnership agreement must address the procedure for dissolving the partnership. The agreement must explain what should be done when a partner dies or is unable to participate in the partnership due to disability or if he or she simply wants to leave the partnership. Included in this heading is what should be done if the partnership becomes insolvent and/or the sale of the partnership becomes necessary.

THE ADVANTAGES OF A PARTNERSHIP AGREEMENT

A partnership agreement is based upon symbiosis in that each partner should, in essence, benefit the other parties to the agreement.  A partnership allows parties to aggregate or pool the resources, talents, funds, and property of the members of the partnership which in turn should produce a profit for all.

THE DISADVANTAGES OF A PARTNERSHIP AGREEMENT

Partners in general partnerships are jointly liable for the debts of the partnership. If there is a partner who would have created a lot of encumbrances for the partnership then all will be considered as responsible for resolving the issue or “making good” on the debts  and honoring  the commitments of the partnership.

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