How to Write a Partnership Agreement?
It’s advantageous to create a partnership agreement when going into business with one or more other people. However, many aspiring business owners don’t understand how to write a partnership agreement that will prevent issues down the road. The easiest way to write a valid agreement without mistakes is by creating a template using a contract management platform.
Does a partnership agreement have to be in writing?
A partnership agreement must be in writing if you want to avoid conflicts and misunderstandings in the future. Forming a written contract allows you and your partner to delegate each party’s rights and responsibilities in a way that fits your company’s needs.
When determining how to write up a business partnership agreement, keep in mind that you should consider how much ownership or capital each partner has. This will help you establish the shares of profits and losses in a way that lines up with each partner’s investment.
The problem with verbal partnership agreements is that there is not an official document to refer back to when there are questions regarding the terms and conditions of the deal. On the other hand, when the agreement is in writing both parties can clearly see what the contract entails, mitigating confusion and arguments.
Misunderstandings between partners can lead to:
Lawsuits that involve unwritten contracts are never cheap, easy, or quick to resolve. This is because when there is nothing in writing, the parties involved in the deal typically have completely different interpretations of what was included in the agreement. As a result, the partners spend an unnecessary amount of time and money in court over an issue that could have been avoided with a written contract.
When the parties don’t agree on what the terms of the agreement are, it may not be as beneficial as you had expected. For example, the other stakeholder could take home more profits than you because the terms of the agreement are not set in stone. Also, verbal contracts are not as easy to alter as written agreements, so it’s more challenging to forge a more beneficial working partnership.
Misunderstandings create tension, stress, and lower trust between business partners. With verbal agreements, the two parties are likely to disagree on the terms of the contract, leading to arguments about who’s right. However, this does not allow for healthy collaboration since the parties are butting heads instead of trying to work together on a deal that will benefit both businesses.
Types of partnership agreements
When deciding how to structure a partnership agreement, you must first consider the different types, which include:
1. General partnership (GP)
A GP is the most basic kind of partnership. Profits and ownership of the company are typically split evenly between the partners. In this partnership, each party has total liability, which means that they are all personally responsible for the company’s debts and legal obligations. A GP is also easy to create and dissolve since it does not require forming a business entity with the state.
A partnership generally is required to include two people. Any liabilities that the partnership may bear must be agreed upon by all partners. Though oral agreements are lawful, it is preferable to document the partnership with a formal written partnership agreement. A general partnership agreement should cover, anticipate, and settle any form of dispute.
Make sure to discuss, agree on, and include the following components in your working partnership agreement while you and your partner(s) are drafting it:
Include the names of all partners, the business name, and the purpose of the partnership. Set the date on which you wish the partnership to become legally active.
Specify each member’s initial capital contribution (the amount of money each partner will put into the business). In most cases, general partnership agreements include a deadline for initial capital contribution deposits.
Enter the proportion of ownership in the partnership for each member. General partnerships typically distribute ownership equally among partners.
Losses and profits
Plan how the partnership will split earnings and losses and how often profits will be delivered to members. It’s a smart idea to provide the option of preserving revenue to reinvest in the business, especially if you’re just starting off.
Management and decision-making
Determine how you will make business choices, keeping in mind that it is advisable to prevent a tie vote. This is a common issue when you have an even number of partners and need a majority vote to make decisions regarding the business.
2. Limited partnership (LP)
LPs have at least one general partner who is entirely responsible for the company. Also, one or more limited partners supply funds but are not actively involved in business management, and they are only at risk for the amount they invest. LPs are formal business entities, meaning the state must authorize them.
3. Limited liability partnership (LLP)
LLPs are similar to general partnerships in the sense that all the partners are actively managing the company. Each partner still has full responsibility for the business’s debts and legal liabilities, but they aren’t held accountable for the errors and omissions of the other partners.
Tips on how to write a partnership agreement for a business
When starting a business with other people, it’s always wise to form a partnership agreement. If you don’t have an agreement, then your business partnership will default to your state’s rules, which are not always fair or advantageous to your company.
Here are some tips and tricks on how to make a partnership agreement:
1. Review your state’s rules for partnership agreements through your Department of State
The creation, organization, and dissolution of business partnerships are ruled by state law. However, the Uniform Partnership Act has been implemented in many states. Before writing your contract, be sure to check your state laws regarding business partnerships to determine what’s legally valid. You can find this through your Department of State.
2. Search for templates and customize them
Utilizing a template allows you to create a lock-tight agreement that includes all of the essential terms and provisions required of the state and for your benefit. It’s easy to create a custom partnership agreement template using a contract management tool. You can simply choose your type of partnership and then customize the template to fit your needs.
3. Сonsult a contract attorney
When entering any legally binding contract, it’s always wise to consult an attorney before signing. A legal professional will ensure that your contract is legally permissible and that there aren’t any holes in your terms and provisions. They can also help you draft an agreement that will be the most beneficial to your business.
What should a partnership agreement include?
A written partnership agreement should show the following to avoid confusion and disagreements:
- The name of your business
- The contributions of each partner and the percentage of ownership
- Division of profits and losses between the partners
- Each partner’s authority or binding power
- Withdrawl or the death/incapacitation of a partner
How to write a partnership agreement form using contract management software
If you and your partners don’t specify your responsibilities and rights in a written contract, you won’t be equipped to resolve conflicts, and small misunderstandings could turn into significant disputes.
Using contract management software allows you to easily create a partnership agreement with premade templates that you can customize to suit your business needs. Using a template will ensure that you have an error-free document that benefits you and your partners.