A partnership agreement template
People are acting in partnership when they work in business together and share income or losses of the business. A partnership is not a separate legal entity, when a company is. It means that each partner is personally responsible for the activities of other partners and any liabilities the partnership meets. If you are running a business in a partnership, you should have a partnership agreement template set up. In the next section will make clear what is partnership agreement and what are the benefits of having this document in writing.
What is a partnership agreement?
A partnership agreement is a contract between business partners. This document helps define each partner’s responsibilities. These include accountabilities to each other and responsibilities to the business itself. A partnership agreement will control crucial matters that arise in one’s business, involving how to make decisions and settle disputes among partners.
Once agreement is written, the document must be signed to make it enforceable and legally binding.
Is it required that partnership agreement be in writing?
It is not required by the law to have your partnership agreement in writing. However, the best approach is to engage a lawyer when drafting the document that governs your partnership. It is essential if you have a particular vision for how your partnership will run. Agreement in writing will clear up the liaison between the partners and what the essence of the business will be.
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When no written partnership agreement is in place, there are territory’s relevant legislation and each state’s default provisions that apply. Consequently, making a written partnership agreement makes certain that this legislation does not control how you operate your business.
In addition, having a partnership agreement in writing reduces your risk of having partners contradict about the range of your partnership. Furthermore, if things become unpleasant, above-mentioned agreement makes sure that there is no confusion about certain terms that the partnership runs under.
If the agreement is completely oral in nature, a dispute about the best way to manage the partnership is much more challenging to sort out.
A disputes’ resolution clause will be included in a well-drafted partnership agreement, meaning there will be a process set up, in case disagreements arise.
Terms that should be included in a partnership agreement?
Every partnership differs from each other, and you can reflect these complexities in a partnership agreement. However, some crucial terms should be included in each agreement. These conditions are:
1) Financial contributions – This term defines what will be financial contribution of each partner. Usually, two partners split the contributions in half (50/50), though this is not always the case. It is very important to involve this provision to prevent disagreements in the future.
2) Profits and losses – Like financial contributions, mentioned term will make specific how you should split and manage the partnership’s profits and losses among the partners. It is indispensable to consider whether you want to align this split profit and losses with the split of financial contributions, or if some specific method should apply.
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3) Obligations and rights – Sometimes all of the partners will have alike obligations and rights regarding the partnership. There can also be occasions when each partner is accountable for different aspects of the business. Involving an obligations clause guarantees that each partner knows his/her responsibilities of the partnership.
4) Decision making – This term will define how the decisions will be made by you and other partners in the partnership. Mentioned term will outline what kind of decisions partners may have to make and it will also detail whether these decisions have to be made by: A majority of partners, unanimous vote; or a single partner who can make a decision on behalf of the partnership.
In addition, it is very important to set out whether a partner is capable of entering into agreements on behalf of the partnership, or is he or she able to bind the partnership to business agreements and decisions. If such is the case, the agreement must contain details whether there are any restrictions or limits on this authority.
5) Dispute resolution – Occasionally, the partners will disagree about things related to the business. That is why it is crucial to involve a dispute resolution process. Therefore, the partners will have a direct process to stick to, that will make differences settling process more amicable. It is also very important to include details about what to do should this process go wrong.
6) Exit – This term defines what will happen if one of the partners want to depart and what is the process to stick to, in order to do so. If this term is omitted, the relevant partnership law will apply, and the partnership will automatically terminate when one of the partners give notice that they plan to leave. Involving an exit condition in your partnership agreement overrides the law, enabling you to make a decision to continue the partnership with the remaining partners.
7) Term – This clause shows for what period the partnership agreement is to apply for. It can state that the contract will last the life of the partnership itself, but the shorter period can also be stipulated by the partners. If so, it is essential to have another agreement prepared once the original one has expired.
8) Termination – When the partnerships are prepared for their business to terminate, they must have a process to end the partnership effectively. This term should cover what will happen to the partnership property (if applicable), and each partner’s responsibilities.
To summarize:
A Partnership agreement is a contract between two or more persons who want to operate and manage a business jointly so as to gain money. All partners share part of the partnership’s profits and losses and all partners are responsible for the obligations and debt of the partnership.
Having a partnership agreement for business is helpful for the smooth operation of the partnership. It is mainly crucial should things go wrong. Having an agreement ready makes certain each partner comprehends their responsibilities and duties. It also resolves disputes between partners and saves the partnership from wasting financial resources on expensive lawsuits.
Below you can download a partnership agreement template for free: