Key Takeaways

  • Adding a partner requires reviewing your current partnership agreement for admission procedures.
  • A new partner’s contributions and responsibilities must be clearly defined and documented.
  • The IRS must be notified when ownership changes occur, especially if the partnership gets a new EIN.
  • Legal and financial due diligence is critical before finalizing a partnership expansion.
  • An updated written agreement should be signed by all existing and new partners.

Adding a partner to a partnership agreement at a future date can be done only according to the provisions specified in the existing agreement.

What Is a Partnership?

A partnership is a business structure with two or more owners, operating for mutual profits.

There are three types of partnerships:

  • General partnerships
  • Limited partnerships
  • Limited liability partnerships

You need not file any document with a government agency for creating general partnerships, whereas creating limited and limited liability partnerships requires you to file a legal document. In all states except Louisiana, formation and operation of partnerships is regulated by the Uniform Partnership Act adopted by the state.

What Is a Partnership Agreement?

A partnership agreement can be oral or in writing. It sets out the terms of partnership the parties have agreed to.

Creating a partnership agreement makes the partners discuss important aspects of the business, like allocation of profits and losses, managing day-to-day operations of the business, and dealing with situations like death or exit of a partner. Setting out your intentions in writing helps the partners avoid misunderstandings about the business and protects you from associated legal hassles that may otherwise crop up down the line.

A partnership agreement replaces the default state rules with the ones the parties chose to have. Default partnership laws of the state apply to partnerships operating without an agreement. A partnership agreement helps the owners control the business by defining the business structure and relationship between the partners; it details out the rights and responsibilities of the partners.

Some of the important provisions included in a partnership agreement include:

  • Profit-sharing ratio or percentage
  • Procedure for addition of new partners
  • Provisions for buy-out by existing partners
  • Dispute resolution mechanism
  • Procedure for making decisions and managing the business

Legal and Financial Considerations When You Add a Partner

Before you add a partner, evaluate both legal and financial implications. Begin by reviewing your current partnership agreement to confirm that it includes a process for admitting new partners. If it doesn’t, the agreement should be amended by a unanimous or majority vote as required.

From a financial perspective, consider:

  • Capital Contribution: Determine how much the new partner will invest and in what form (e.g., cash, equipment, intellectual property).
  • Equity and Profit Sharing: Clearly define the ownership percentage and profit/loss distribution.
  • Debt Obligations: Ensure the new partner understands and agrees to be liable for current or future business debts.

Additionally, consult with a tax professional to address the potential need for a new EIN if ownership structure changes significantly, especially if the partnership technically dissolves and reforms under new terms.

How to Write a Partnership Agreement

1. Understand the Uniform Partnership Act

Search online for the Uniform Partnership Act of your state, and go through it.

2. Discuss With Other Partners

Meet the other partners and discuss all the important issues like:

  • Purpose of the business
  • Name and Identity of the business
  • Initial capital
  • Profit allocation ratio
  • Liability
  • Decision making
  • Length, expansion, or dissolution of partnership.

3. Assign the Drafting Task to Someone

Assign a single person to take notes and draft a preliminary agreement. Parties can then discuss, review, and revise the draft agreement.

4. Consult an Attorney

It's always helpful to seek legal advice from an experienced business lawyer. You can either leave the complete drafting to attorney or discuss the general outline of the partnership agreement.

5. Title the Agreement

Give a suitable title to the agreement. For example, you can identity it by typing the words “Partnership Agreement” at the top of the document.

6. List out All the Partners Along With Their Residences

Begin the agreement with the names of the partners and their places of residence. Identify a common term to refer all the partners in the document, and state their willingness to enter into the agreement.

7. Other Provisions to Include in the Agreement

  • Identify the nature or type of business that would be operated under the partnership agreement.
  • Give a name to the partnership business.
  • Specify the place of business.
  • Set out the terms of existence, e.g., the date on which the partnership will come into effect and the termination date, if any.
  • State the capital contribution of each partner; it can be in cash or kind (property, services, bonds, etc.)
  • Identify the property owned by the partnership (whether contributed or purchased).
  • Decide on allocation of profits and losses. It's usually done on the basis of capital contribution and involvement of the partners in business operations.
  • Determine the manner and authority for making business decisions.
  • Authorize someone to make contracts on behalf of the partnership.
  • You may want to restrict the partners from taking up outside employment and business.
  • Explain the procedure for admission and exit of new partners.
  • Provide the manner for dissolution of partnership.
  • Clarify the plan of action in the event of a partner's death.
  • Choose the law that will govern the partnership agreement. It would usually be the law of your state.
  • Include a clause that the agreement is complete, so that no one can claim the existence of other terms of agreement any time in future.
  • Provide space for the partners to affix their signatures and write their names and date.

Once the draft agreement is ready, distribute it to all partners and schedule a meeting to take their signatures.

Evaluating a Potential Partner Before Admission

Not every prospective partner is a good fit. Before you add a partner, conduct a thorough evaluation, which may include:

  • Background Check: Review the person’s professional history and legal record.
  • Skill Set Compatibility: Assess whether the potential partner brings strategic value to your business.
  • Cultural Fit: Ensure alignment in business philosophy and work ethic.
  • Financial Review: Examine the partner’s financial standing to prevent risk to the business.

Taking the time to vet candidates reduces the likelihood of conflict and improves partnership success.

Formalizing the Addition of a New Partner

To formally add a partner, follow these essential steps:

  1. Obtain Written Consent: Secure written approval from all current partners, especially if required by the existing agreement or state law.
  2. Amend the Partnership Agreement: Update the agreement to include the new partner’s rights, duties, and profit-sharing ratio.
  3. Prepare an Addendum or New Agreement: You may draft a new agreement or attach an addendum that outlines the changes, signed by all parties.
  4. File with the State (if required): While most general partnerships don't require filings, certain jurisdictions may require an amendment to a partnership certificate.
  5. Update the IRS and Other Agencies: If the EIN changes, notify the IRS. Also, update your business licenses, permits, and bank accounts as needed.

This formal documentation process ensures legal clarity and avoids future disputes.

Frequently Asked Questions

1. Can I add a partner without a written partnership agreement? Yes, but it’s highly discouraged. Without a written agreement, state default laws apply, which may not reflect your business intentions or protect your interests.

2. What documents are needed to add a partner? You typically need an amended partnership agreement, a signed consent form, and possibly updated business licenses or tax documentation.

3. Does adding a partner require notifying the IRS? Yes, if the addition changes the ownership structure, you may need a new EIN and must update tax filings.

4. How are profits divided when a new partner is added? Profit sharing is typically renegotiated and detailed in the amended agreement, based on contributions and partner roles.

5. Can a partnership restrict new partners from certain decisions? Yes, your agreement can limit a new partner’s authority in decision-making, subject to what’s agreed upon by all partners.

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