A partnership agreement clearly describes the rights and responsibilities of each business partner. Business partnerships that do not have a written partnership agreement are subject to state Uniform Partnership Act (UPA) laws. The UPA is designed to address business partnerships in general and does not specifically address the needs of individual businesses.
A written partnership agreement provides policies, guidelines and procedure for the following: handling conflict, structure of the business partnership, criteria for partners' shares and losses, roles and responsibilities of partners and addition or loss of partners. To write a business partnership agreement, follow these steps.
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Create a business partnership document that suits your business needs. Templates and checklists are available online (see Resources). Review your state laws regarding the Uniform Partnership Act (UPA) to ensure that your partnership agreement meets all of the minimum legal requirements. The template must include the name of your partnership. Make sure your partnership name is not already taken. You can use your own last names for the partnership agreement or make up a name as long as that name is not already in use.
Define your partnership contributions. Provide the following details: each partner's responsibility for contributing to the business start-up and type of investment contributed by each partner. Types of investments may include cash, property or in-kind services. Outline the proportion of the business each partner owns.
Describe your procedure for determining profit-and-loss allocation. Decide how profits will be divided and distributed during the operation of your business. Clearly state the percentage of profits that will be distributed to each partner and criteria for distribution. State whether partners are able to make cash withdrawals from the business and describe the process for distributing business losses.
Develop a statement which outlines the authority of partners. State whether individual partners' decisions are binding or if partners have to have the consent of all other partners before making a decision that affects the operation of the business. If there are certain circumstances where individual partners can make binding decisions without the consent of all partners, clearly state these circumstances in your partnership agreement.
Develop a decision-making and conflict-resolution process. Decide whether business decisions will require the unanimous support of all partners or a majority vote. Ensure that you carefully define the terms unanimous and majority, with respect to your business. Include a procedure for the resolution of disputes, especially if you are not able to come to a decision regarding an aspect of the business. A conflict-resolution strategy might include alternative dispute resolution or a third-party arbitrator.
Define the duties of management. State the roles and responsibilities of each business partner with respect to management of the business. Review these roles and responsibilities on a regular basis and make changes or updates based on partners' needs, changes in partnership or changes to the operation of the business.
Consider expansion and succession planning. Develop a procedure for adding partners to the business or replacing partners who leave the business. The procedure should include information regarding the portion of investment any additional partners will receive in the company and the portion of investment partners who leave the business will receive.
Tips and warnings
- All partners should sign off on the business partnership agreement to make it a legally binding document.
- Review your partnership agreement on a regular basis to ensure that it reflects the operations of your business.
- Review your state laws to ensure that your business partnership does not violate business laws or regulations. Consider asking a legal professional to review your partnership agreement for errors and omissions.
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