Does a Partnership Agreement Have to Be in Writing?
Does a partnership agreement have to be in writing? It's best to draft a partnership agreement at the beginning of the partnership.3 min read
Does a partnership agreement have to be in writing? It's best to draft a partnership agreement at the beginning of the partnership.
Many partnerships are formed naturally because the people who are involved in the business share the same goals, so their partnerships don't need formation documents to exist. However, if members are to proceed with the partnership, it would behoove them to make a formal, written agreement.
What a Partnership Agreement Is
A partnership agreement (also called the articles of partnership) is a document that is signed by the members of a business group.
- A partnership agreement in a limited liability company is referred to as an Operating Agreement.
- In a corporation, this agreement is referred to as a Shareholder Agreement.
- In a general partnership, this is just called a Partnership Agreement.
The best time to draft a partnership agreement is when the company is first formed. At this time, partners should discuss their expectations for the business and what they expect from each other.
Why Partnership Agreements Are Beneficial
Partners don't need to file their articles of partnership with a government agency, but it's good for them to have a written document to refer to later. You never know how your company might grow, so it pays to talk about your expectations and vision. With that in mind, a partnership agreement serves the following purposes:
- It's a governing document for the partnership. Without a written agreement in place, the partnership will be governed by the default rules of the state where it's based.
- Written partnership agreements protect the company and each partner's investment in it. If there is no written partnership agreement, partners are not allowed to draw a salary. Instead, they share the profits and losses in the business equally.
- The agreement outlines the rights, responsibilities, and duties each partner has to the company and to each other. This, in turn, will prevent members from feeling like they are shouldering more of the burden than others.
- When there is no partnership agreement in place, the partnership might ultimately dissolve when a member leaves by retirement, death, or by selling his interest in the business.
You never know what can happen in the future, especially if one partner leaves or members start arguing about profits or the direction of the company. Head off future disputes before they arise.
What Should Be in a Partnership Agreement
Each partnership agreement is unique because there are no specific requirements for one. However, all partnership agreements must list the name of the business, the business's location, and the company's mission. Depending on the type of partnership you have, you should also include at least six sections, like:
- A section that deals with the allocation of profits.
- How will profits be divided among partners?
- Is each partner's take proportional to their investment or are profits split evenly among partners?
- A section that deals with taxes, losses, and debts.
- Who is responsible for filing tax forms for the company?
- How much liability does each partner have?
- A section that deals with the allocation of shares.
- How much interest does each partner have in the company?
- Like profits, it is a proportional system or evenly divided among members?
- A section that deals with the management of the company.
- Who will make major decisions for the company?
- Who is responsible for the day-to-day management and bookkeeping?
- How much control do limited partners have?
- A section about voting rights.
- Will partners be able to vote on major decisions?
- Are there protections for minority owners?
- Is there any way to break a tie?
- Clauses that deal with the future of the partnership.
- How could the partnership be terminated?
- What are the conditions under which partners can sell their shares in the company?
- What are the conditions of transfer in case one partner becomes ill, incompetent, disengaged, or dies?
Why You'll Need a Lawyer to Draft Your Partnership Agreement
While having a partnership agreement generally is preferable to having none, not all are perfect. Get an attorney to help you draft the best partnership agreement possible. Without an attorney, you run the risk of drafting an agreement that contains confusing language. An agreement drafted by an attorney will account for every possible scenario that could affect your new company.
If you need help drafting your written partnership agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.