What Should be Included in a Partnership Agreement?

Partnership Agreement Terms
Partnership Agreement Terms. Tim Robberts/Getty Images

What is a Partnership? 

A partnership is a business formed with two or more people. Each individual contributes assets to the business and has a share in the profits and losses of that business. Some partners actively participate in the business, while others are passive. 

What is a Partnership Agreement? 

When you form a partnership, the most important document is a partnership agreement. A partnership that begins without an agreement can be jeopardized if something happens to one or more of the partners.

 

The partnership agreement sets out all the terms and conditions agreed to by the partners. In this document, every possible contingency is included. Here is a list of questions to be asked when preparing a partnership agreement.

Why Does Our Partnership Need an Agreement? 

Running a business on a handshake is not a smart idea in t he 21st century. Having a partnership agreement gives you and your partners protection in case something happens. It answers the "what if" questions so you don't have to try to deal with them in the midst of a crisis. For example, if a partner leaves the business, you can look at the agreement to guide you. 

Do We Need an Attorney to Prepare a Partnership Agreement? 

Since this is a binding legal document, it's always best to have an attorney guide you. You can do some of the work yourselves by using a partnership agreement template {or the list below), but have an attorney review it to make sure you didn't miss anything.

 

What Should a Partnership Agreement Include? 

A partnership agreement should include the following information:

  • Name of the Partnership. There are several different types of partnerships, and you can include the type in your partnership's name. 
  • Name the partnership is doing business as (if different). For example, a partnership might do business under several different names for different kinds of services offered. 
  • Term (length) of the partnership. A partnership can be perpetual or for a specific term length. 
  • Purpose of the partnership. What activities is the partnership engaging in? What products or services will be sold? How will new products or services be added? 
  • Types of partners in a partnership. Some partners may have more day-to-day duties (general partners), while others may just contribute and have limited participation. 
  • Contributions of each partner, in cash, deferred contributions (installments), property (including intellectual property), and service.
  • Admitting new partners, and what is the required new partner contribution. 
  • What happens if a partner fails to make an initial contribution?
  • Additional future contributions. When will additional contributions be accepted? How will future contributions affect the partner's share? 
  • How profits and losses are distributed among the partners (equal, unequal, percentages, etc.)?
  • Draws to partners. When may partners take a draw from their partnership share?
  • Retention of profits for business needs. Under what circumstances must partners refrain from taking out profits?
  • Distribution of profits/allocation of losses to each partner. How are profits and losses allocated to partners, for the purpose of partner percentages?
  • Management powers and duties, including skills contributed, hours of work of each partner. 
  • How decisions are made. What matters must be voted on, and what percentage of the partners must agree to any action. 
  • Financial matters, including periodic financial statements and how books are to be kept. 
  • Power to borrow money on behalf of partnership. How is this power distributed? Is a vote required for borrowing over a certain amount? 
  • Power to authorize expenses, signatures required
  • Meetings. When are meetings held? How many partners constitute a quorum for meetings.
  • Maintenance of records. Where and how are partnership records kept?
  • Partner time off, including leaves of absence, vacations, sick leaves
  • Outside business activities (permitted, restricted), and conflict of interest policy. 
  • Ownership of business assets. Does the partnership own all assets, or are some held by indivdual partners? 
  • Sale or transfer of a partner’s interest to another partnerp or to the partnership, at retirement or other event. This an include Buy-sell agreements for partners (specific buy-out methods). 
  • Continuity of partnership business when a partner leaves, dies, is terminated (may be part of the buy-sell agreement).
  • Non-competition clause. This clause restricts a partner leaving the partnership from competing with the partnership's business, within a defined area and time period. 
  • Non-disclosure clause, non-solicitation clause. These clauses restrict partners and former partners from disclosing proprietary business, or from soliciting employees or customers away from the partnership. 
  • Expulsion of a partner from the partnership
  • Mediation and arbitration for disputes, including mandatory arbitration, if agreed to. 
  • Amending partnership agreement, how and when. 
  • Adherence to state law. This is for the purpose of potential litigation, to establish the state in which litigation would be held. 
  • Severability (if one part of the agreement is found to be invalid, it doesn't affect the rest of the contract)

Every partnership should have a partnership agreement, to make sure that every possible situation that may affect the partners and the business is covered. The partnership agreement should also be reviewed periodically to make sure the wishes of the partners have not changed.