Updated November 10, 2020:

The term of partnership agreement is a legal document that governs a business run by two or more individuals. With this structure, each person contributes to finances and/or skills to the business and takes part in its profits and losses. Partners may or may not have an active role in running the business. With the written partnership agreement, the individuals involved agree to share skills, work, and money to establish a for-profit business and set out terms by which the business in question will operate.

Characteristics of a Partnership Agreement

If you don't have a partnership agreement in place, the business may be in jeopardy if a partner is no longer able to participate. This legally binding document should establish all terms and conditions that apply to the operation of a partnership. Although you may be tempted to rely on a handshake agreement, doing so means you may be out of luck if a crisis occurs, such as a partner leaving the business. A business attorney can help you draft a partnership agreement that considers all contingencies.

Elements of a Partnership Agreement

Your partnership agreement should include:

  • The name and type of partnership.
  • The doing business as (DBA) name if applicable.
  • Whether the partnership is perpetual or for a specific term.
  • The purpose of the partnership including products and services to be offered.
  • The types of partners, such as general or limited.
  • The contributions of each partner, including property, service, cash, and deferred contributions.
  • Process of admitting new partners including required contribution.
  • Required future contributions and how they will impact shares.
  • Profit and loss distributions.
  • Profit retention for business needs.
  • Roles and responsibilities of managers, including work hours.
  • Voting and decision-making procedures.
  • Financial statements and bookkeeping provisions.
  • How and when meetings are held.
  • How records are maintained.
  • Time off for partners.
  • Conflict of interest policy.
  • Business asset ownership.
  • Transfers and sales of partnership interests.
  • Continuity of the business if a partner departs or dies.
  • Non-compete, non-disclosure, and non-solicitation clauses.
  • Dispute mediation and arbitration.
  • Severability.
  • Provisions for a failure to make an initial contribution.
  • Circumstances in which partners can take a draw from their profit share.
  • Process by which a partner can be removed from the business.
  • Dispute mediation and arbitration procedures.
  • How and when the partnership agreement may be amended.
  • The state laws by which the partnership will abide for circumstances not covered in the partnership agreement.

The agreement should be reviewed and updated periodically to make sure all eventualities are accounted for.

Restrictive Covenants

These clauses are designed to prevent certain actions by partners to serve the best interests of the business. The primary types of restrictive covenants are non-solicit, non-disclosure, and non-compete, and your partnership agreement should ideally include all three. With a non-compete agreement, a partner who leaves the business may not start or work for a competing business for a certain amount of time within specific geographic boundaries. Non-disclosure protects confidential information when a partner leaves the business; he or she may not disclose these details to third parties or use it to harm the partnership. Non-solicit agreements prevent a partner from stealing clients when he or she leaves.

Buy-Sell Agreement

These provisions can be a separate agreement or be integrated as a clause in the partnership agreement. The buy-sell clause indicates how the partnership will proceed if a partner becomes incapacitated or dies, if the partnership dissolves, or if a divorce affects ownership. It can also provide guidelines to follow in the event of bankruptcy.

Having a solid buy-sell agreement prevents partners from making decisions in the heat of the moment when an unexpected situation occurs. You should include guidelines for establishing the business's value, how the purchase price must be paid, and whether insurance exists to make up part of the purchase price.

Partnership Allocations

This section indicates exactly how profits and losses should be divided among the partners. This is often done based on interest percentage and ownership, but another arrangement can be established in the partnership agreement. This also allows you to properly represent the business's finances with the IRS. The agreement should also address profit distributions and other forms of compensation.

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