Key Takeaways

  • A partnership agreement between two companies should clearly define roles, contributions, and profit sharing.
  • Include clauses for dispute resolution, exit strategies, and intellectual property ownership.
  • Joint ventures differ from general partnerships and require their own tailored agreement.
  • A well-drafted agreement protects both parties legally and financially.
  • Consulting a qualified attorney ensures compliance with applicable laws and reduces future disputes.

Understanding partnership agreement between two limited companies is important if you want to start a business with someone else. When two people decide they want to start a business together, this is known as a partnership. The profits and losses of a partnership are split between the partners. Most times, the partners who own the company will have an equal split regarding its management.

Even though you do not have to have any type of legal documents to officially start a partnership, it is recommended that you create a partnership agreement. This agreement will outline the intricacies of the partnership, including how it is to be managed, how the profits will be distributed, and how it can be dissolved if need be.

How Many Partners can a Partnership Have?

A partnership can have up to 20 partners. If you start a company with people and there are more than 20 partners, you will need to register it as a company.

Key Clauses to Include in a Partnership Agreement

When drafting a partnership agreement between two companies, it’s essential to cover specific clauses to protect both parties' interests and clarify expectations. Some key clauses include:

  • Business Purpose: Clearly state the partnership's goals and the scope of activities.
  • Roles and Responsibilities: Define what each company is responsible for operationally and financially.
  • Capital Contributions: Detail the amount, form (cash, equipment, intellectual property), and timeline of contributions.
  • Profit and Loss Sharing: Specify how profits and losses will be allocated between the companies.
  • Decision-Making Process: Establish how decisions will be made—whether unanimously, by majority, or other voting structures.
  • Dispute Resolution: Include a mechanism for resolving conflicts, such as mediation or arbitration, to avoid litigation.
  • Exit Strategy: Outline what happens if one party wants to withdraw, sell its interest, or dissolve the partnership.
  • Confidentiality and Non-Compete: Protect sensitive information and prevent competition during and after the partnership.

A comprehensive agreement reduces misunderstandings and provides a roadmap for managing the partnership throughout its lifecycle.

Pros and Cons of a Partnership

When you form a partnership, this gives you the ability to raise capital. Please be aware that a partnership is not its own separate entity. This means any expenses and debts accrued by the partnership will be the responsibility of the partners. If need be, the partners' personal assets can be touched to pay back any unpaid debts. You also need to note that you can be held liable for the actions of your partners.

How to Structure a Partnership Agreement Between Companies

A partnership agreement between two companies can be structured in several ways depending on business goals:

  1. General Partnership: Both companies share equal responsibility for debts, obligations, and management.
  2. Limited Partnership: One company acts as a general partner managing operations, while the other serves as a limited partner with liability restricted to its investment.
  3. Joint Venture: A temporary partnership for a specific project or timeframe, often dissolving upon project completion.

The agreement should specify the partnership type and comply with state laws regulating partnerships. Additionally, each company’s liability exposure and operational control should be explicitly detailed to avoid unintended legal consequences.

What Is a General Partnership?

If you were to form a general partnership, this means that each partner is going to be held responsible for the debts and liabilities of the company. Furthermore, it also means that each partner has the potential to be held liable for the actions of the other partners.

If you want to set up a partnership, the process is fairly easy and straightforward, especially when compared to forming a company. The internal structure is very flexible as well.

In regards to the maintenance of a partnership, it is usually much simpler than that of a company. You will have fewer statutory controls to abide by. For example, you don't have to register the partnership agreement that you and your partners enter into. Additionally, when it comes to taxes, you don't have to file a return. Instead, you will claim the income on your personal taxes.

A major advantage that general partnerships have is the ability to recruit and retain some of today's top employees by offering them the option of becoming a partner. There's also the advantage of being able to raise capital.

Important Legal Considerations for Partnerships Between Companies

Forming a partnership between two companies introduces legal complexities not found in partnerships between individuals. Consider the following:

  • Regulatory Compliance: Ensure the partnership complies with industry-specific regulations or licensing requirements.
  • Intellectual Property Ownership: Define ownership and usage rights for jointly developed intellectual property, trademarks, or patents.
  • Insurance and Indemnification: Agree on coverage for liability insurance and mutual indemnification to protect both companies from third-party claims.
  • Third-Party Contracts: Clarify how the partnership will enter contracts with vendors, clients, or subcontractors and which company bears responsibility.

Seeking legal counsel when drafting the agreement ensures these issues are addressed appropriately.

Benefits of Being a Limited Partner

When you create a limited partnership, this means you have general and limited partners. A limited partner is limited in regards to the liability he has at stake. For example, he may make financial investments but does not have any type of say so regarding the managerial aspects of the company. More so, the limited partner is not held responsible for any debts that the partnership acquires. If you become a limited partner, you should know that you can be replaced and this replacement can take place without the company having to dissolve.

Key Differences Between a Partnership Agreement and a Joint Venture

Although partnerships and joint ventures are often used interchangeably, they have distinct differences:

  • Duration: Partnerships tend to be ongoing, while joint ventures are typically project-specific and temporary.
  • Legal Entity: A joint venture may form a new legal entity (LLC or corporation), whereas a partnership may operate under an agreement without separate incorporation.
  • Scope of Work: Joint ventures are often limited to a single objective, while partnerships may cover broader or ongoing operations.

For companies collaborating on a specific project, a joint venture agreement may offer more flexibility and defined timelines than a traditional partnership agreement.

What Is a Joint Venture?

A joint venture is usually created when partners want to business with one another on a short-term basis. The advantage of establishing a joint venture is to gain access to a new market. A joint venture can structure itself as a:

  • Partnership.
  • Limited Partnership.
  • Corporation.

The joint venture itself will be treated as its own entity. The laws that will govern a joint venture are going to be based on the scope of the partnership as well as the type of structure that the joint venture chooses to incorporate itself as.

When you create a joint venture agreement, it is going to outline the duties of each partner. It cannot, however, be used to outline which duties are being eliminated. For example, it is against the law for a partnership agreement to eliminate one of the partner's responsibility to cover debts accrued by the partnership. The only way to do this is to become a limited partner.

When to Use a Partnership Agreement Between Companies

A partnership agreement between two companies is particularly beneficial in the following situations:

  • Shared Product Development: Collaborating to co-develop a product or service.
  • Market Expansion: Entering a new geographic or demographic market by leveraging each company’s resources.
  • Joint Marketing Efforts: Pooling marketing budgets and channels to increase visibility and reach.
  • Resource Sharing: Sharing equipment, facilities, or specialized personnel to reduce overhead.

A partnership agreement provides a clear framework for how these collaborations will operate, minimizing disputes and aligning each company’s expectations.

Frequently Asked Questions

  1. What is the difference between a partnership agreement and a joint venture agreement?
    A partnership agreement governs ongoing collaboration, while a joint venture agreement is typically project-specific and may form a separate legal entity.
  2. Do two companies need to register their partnership?
    It depends on the state and the structure; some partnerships must register with state agencies, while others can operate under a private agreement.
  3. Can a partnership agreement limit liability?
    Yes, with structures like a limited partnership or by incorporating specific indemnification clauses.
  4. Should intellectual property rights be included in a partnership agreement?
    Absolutely. The agreement should clarify ownership, usage, and licensing of any jointly developed intellectual property.
  5. How can disputes between partner companies be resolved?
    A partnership agreement should include a dispute resolution clause, such as mediation, arbitration, or jurisdictional court specifications.

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