Key Takeaways

  • The management of a partnership involves defining clear roles for limited partners, general partners, and managing partners.
  • Effective partnership management requires written agreements that cover responsibilities, dispute resolution, and financial contributions.
  • Success in partnership management also depends on building strong partner relationships, clear communication strategies, and performance monitoring.
  • Risk management, accountability mechanisms, and strategic alignment between partners are critical for long-term success.
  • Partnership agreements should include plans for resolving disputes, dissolving the partnership, and updating terms as the business grows.

The managing partnership agreement governs the roles and responsibilities of a company's managing partners. Some partnerships consist of just two individuals, while others have many owners categorized into separate groups. These typically include general or operating partners, limited partners, and a managing partner who oversees business operations. Different partner classes have different powers and financial benefits.

Limited Partners

Limited partners have joined the business as an investment and have no operational duties. This partner has invested capital in hopes of a financial return but takes on the risk of losing his or her investment if the business fails.

Limited partners are common in large partnerships. In some publicly traded partnerships, equity investors can even trade their shares. This is most common in the precious stone, mining, and extraction industries.

A partnership that includes a class of limited partners must use the word "Limited" in its name and must detail the limited partners' rights and obligations in the partnership agreement. In many cases, these include the following:

  • No management control, with the potential exception of limited voting rights
  • No financial obligation if insolvency or bankruptcy befalls the partnership
  • The ability to amend the partnership agreement by a vote
  • The ability to vote in new or replacement partners

The powers received by limited partners are dictated in clauses, covenants, or articles of the partnership agreement. In many cases, the business is structured to pass losses to limited partners in its early days and limits their ownership shares as the company grows. Other agreements give preferred status to limited partners and offer termination or buyout rights for their shares.

General Partners

Every limited and standard partnership must have one or more general partner. All partners in a standard partnership are general. This is commonly the case for professional engineering, law, accounting, and medical practices.

Voting and financial rights and restrictions for general partners are set out in the partnership agreement. Some businesses may establish levels, such as associate, general, and senior partners, each with its own financial and voting rights.

When a general partnership fails, every partner shares in the financial obligation that ensues. Typically, voting rights are based on each partner's capital ownership percentage, which means that partners who own more of the company enjoy a more powerful vote and more say over the company's operation.

Managing Partners

Managing partners are responsible for the entire partnership, with responsibilities that include ensuring the successful negotiation of contracts, effective human resources, accurate accounting, and other essential business tasks. Managing partners sometimes receive a straightforward bonus or guaranteed payments in exchange for their services, but do not usually receive additional voting rights or other benefits.

Key Skills for Effective Partnership Management

Successful management of a partnership requires a diverse set of leadership and interpersonal skills. A managing partner should possess:

  • Strong Communication: Clearly articulate expectations, goals, and feedback between all partner groups.
  • Conflict Resolution Abilities: Address disagreements promptly and constructively to prevent escalation.
  • Strategic Thinking: Align partnership activities with the long-term business vision.
  • Decision-Making Competence: Make informed choices that benefit the partnership as a whole.
  • Relationship Building: Foster trust and cooperation among partners and external stakeholders.
  • Adaptability: Respond to market changes and adjust partnership strategies when necessary.
  • Financial Literacy: Understand financial statements and ensure responsible management of partnership funds.

These skills help maintain harmony within the partnership and promote sustained growth.

Writing a Partnership Agreement

The partnership agreement is a legal document that includes your comprehensive plans, strategy, and approach for the partnerships. Each partner's rights, expectations, and responsibilities should be clearly outlined and the agreement should serve as a complete guide to partnership operations.

  • Include specifics about what should happen if one of the partners goes bankrupt, is convicted of a crime, or can otherwise no longer participate in business operations.
  • Consider establishing a third-party arbitrator who can help you if conflicts arise. This should be a person who is respected by both parties but will not take sides. The identity of the arbitrator and the circumstances under which he or she should be engaged should be detailed in the partnership agreement.
  • Have the draft agreement reviewed by a contract lawyer to account for any overlooked areas that should be included.
  • When the agreement is complete, develop and stick to a schedule for ongoing review and assessment. This will ensure that the original terms and conditions remain valid and allow you to add new terms and conditions to reflect changes and growth. When revisions are made, have them legally reviewed.

Essential Elements of Partnership Management

When addressing the management of a partnership, several core components should be included in your strategy:

  • Defined Partner Roles: Clearly describe each partner's duties, whether limited, general, or managing.
  • Operational Processes: Outline how decisions are made, who holds decision-making authority, and the scope of such authority.
  • Performance Metrics: Establish measurable goals and key performance indicators (KPIs) for tracking success.
  • Communication Channels: Define how and when partners will communicate, including regular meetings and reporting formats.
  • Conflict Resolution Procedures: Include methods such as mediation or arbitration to resolve disputes effectively.
  • Exit and Dissolution Terms: Specify what happens if a partner wishes to leave or if the partnership needs to be dissolved.
  • Risk Management Plans: Identify potential risks and detail strategies to mitigate them, including insurance coverage if applicable.

Having these components in place helps ensure that the partnership operates efficiently and minimizes misunderstandings.

Sample Managing Partner Agreement

This sample agreement is from USA Gymnastics.

1. Partners

___________________________________________ (Partners) make the following Partnership Agreement.

2. Creation of Partnership

As of ___________________, the Partners agree to enter into a Partnership for the purpose of operating a business known as:

____________________________________

(Partnership Business).

The name of the Partnership (if different from name of Partnership Business) shall be:

____________________________________ (Partnership Name).

3. Nature of Partnership Business

The Partnership Business will consist of the following business activities:

____________________________________________________________________

4. Contributions to the Partnership

The Partners will make the following contributions to the Partnership:

Partner Name

Cash Contribution

Other Contribution

(describe property and/or work; give cash value)

Total cash value:

Total cash value:

Total Contribution Value

Best Practices for Managing Partner Relationships

Maintaining positive partner relationships is fundamental to the management of a partnership. Consider the following best practices:

  • Regular Partner Reviews: Conduct performance assessments and reviews to align expectations.
  • Shared Vision and Goals: Ensure that all partners agree on the long-term objectives of the business.
  • Transparent Financial Reporting: Provide consistent, accurate financial updates to all partners.
  • Recognition and Incentives: Acknowledge contributions and offer incentives where appropriate to encourage engagement.
  • Education and Training: Provide ongoing opportunities for partners to improve skills and stay current with industry developments.

By focusing on relationship management, partnerships can remain productive and resilient through challenges.

Frequently Asked Questions

  1. What is the role of a managing partner in a partnership?
    The managing partner oversees day-to-day operations, ensures contract compliance, manages human resources, and guides the overall strategic direction of the partnership.
  2. How can conflicts between partners be resolved?
    Conflicts can be resolved through methods like direct negotiation, mediation, or arbitration. A well-drafted partnership agreement should outline these processes clearly.
  3. What should be included in a partnership management strategy?
    A solid strategy should cover partner roles, decision-making processes, performance measurement, communication plans, and dispute resolution mechanisms.
  4. Why is financial reporting important in partnership management?
    Transparent financial reporting builds trust among partners, ensures accountability, and supports informed decision-making.
  5. Can a partnership agreement be changed after it’s signed?
    Yes, partnership agreements can and should be updated as the business evolves. Changes typically require a vote or agreement among the partners, as specified in the agreement itself.

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