Contract for Business Partners: Everything You Need to Know
A contract for business partners is also called a general partnership agreement. It is a legal document that defines business operations and responsibilities.4 min read
A contract for business partners is also called a general partnership agreement. It is a legal document that defines business operations and responsibilities. These agreements are used for two or more partners who own a for-profit business. It describes the nature of the business and discusses upfront capital contributions of each partner. A partnership agreement is an important document, as it goes into great detail about:
- How the partnership will function.
- What each partner's role will be.
- How important decisions are to be made.
Unfortunately, some promising businesses were ruined because they didn't take the time to address these important issues ahead of time. Using a partnership agreement to lay out the groundwork for the business can go a long way in helping to avoid disputes and problems that can arise.
Oral or Written Partnership Agreement?
Although you can have an oral partnership agreement, it's highly recommended that partnership agreements are in writing when two or more people have made the decision to run a for-profit business together.
You're not required to file the agreement with your local government or state. However, some states may allow you to do so if you want. Visit your secretary of state's website to review what options are available in your particular state. Some states may provide additional benefits to those partnerships who opt to register voluntarily.
What Is a Partnership?
To understand why a contract between business partners is important, it's crucial to have a general understanding of what is a partnership. Characteristics of a general partnership include:
- Two or more people who form a business together.
- Typically operating in accordance with a partnership agreement.
- Being the default business structure for two or more people who want to go into business together.
- Not being a distinct legal entity like an LLC or a corporation.
- Partners are personally responsible for all debts and liabilities of the partnership.
Creating General Partnership Agreements
- Start by including the official partnership name, the agreement's effective date, the address, and the business purpose.
- List the total initial capital and indicate how much each partner is contributing at the start. You can always add capital at a later date. There should be a deadline for initial capital contributions.
- Ensure all ownership percentages add up to 100 percent. For example, if there are three partners who all have an equal share, the ownership percentage would be 33.3 percent for each.
- Specify how profits and losses will be divided between partners. These are the profits and losses accumulated for each accounting period.
- Specify how net profits are to be divided or whether they will be retained and reinvested into the partnership. This is a recommended step at the partnership's onset to help keep it growing.
- Determine what partners are allowed to write checks on the partnership account on behalf of the business.
- Set forth any vacation day policies and how many days off a partner can take per year. If partners are not working full-time, this may not be a necessary step.
- Choose whether you will use accrual or cash accounting methods. Accrual means revenue is recorded when it is earned and expenses when they are due. The cash method is when money is received and expenses when the money is paid out.
- Choose the governing law that will control the business and settle partnership disputes.
Determining how decisions are to be made is flexible, and it depends on a number of factors, such as how many partners or the business type. No matter how you handle partnership decisions, you need to ensure you aren't ending up with a tied vote. This can be a common problem with partnerships that have an equal number of partners and there is a majority vote necessary to pass a decision.
Once it's completed, print and have all partners and their spouses or domestic partners sign it while in front of a notary public. The reason for this is that spouses will give up any right to inherit ownership interest of a partner who chooses to leave or passes away.
Tips for Partnership Agreements
- Do a name search when choosing your name to ensure no other business has a similar one and you aren't in violation of federal trade name laws.
- For the effective date, choose when you want the agreement to take effect. Specify whether it's for a fixed period or an indefinite duration.
- Keep your business purpose broad, so you don't limit your business down the line.
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