When entering into a Partnership Agreement, parties are agreeing to bring capital, assets, skills, and competencies together to form a working business. A signed Partnership Agreement is recommended to protect the original business plan, assets and partners of the partnership. Partnerships can be complex legal arrangements; to ensure that you're fully aware of all of the benefits and risks it's a good idea to take a few classes in business law. Fortunately, you can now take these classes online and on your schedule.
A new partnership needs a meeting of all parties. This meeting is to discuss the Partnership Agreement, ensuring all parties are in agreement, and are prepared to sign a written Partnership Agreement which binds all partners to the final decisions of the parties. Participants should discuss the following:
- Naming of the Business.
- Term of the Partnership Agreement: Commencement and termination dates must be agreed upon.
- Capital or the set-up investment. Parties decide upon having a separate Capital Account and proportionate percentages per partner.
- Profit and Loss. The Income Account bears the profit and loss of the partnership. In writing, document which partner bears what percentage of income and loss.
- Salaries or Drawings. In a partnership, income is received by taking a draw against the income of partnership. The Partnership Agreement sets out specific amounts or percentage that may be drawn.
- Interest. Usually, no interest is charged on Capital Account.
- Management Duties, Requirements or Restrictions. This section of the Partnership Agreement sets out what each partner's responsibilities are. Inclusions might be: time devoted to the business, and who can incur partnership debt.
- Bank Signatory. Who has authority to conduct business with the bank, and who has permission to write and sign checks?
- Partnership Books. Books should be maintained at the named principal office and all partners should have total access. You will need to decide how books will be kept; in particular, you should determine your fiscal calendar with starting and ending dates. A specific time needs to be chosen for regular audits of the partnership books.
- Voluntary Termination. Occasionally, one or more partners may want to terminate participation in the Agreement. Spell out the rules of termination. All partners must agree to liquidate liabilities, divide Income Accounts proportionate to signed agreement, and disperse the Capital Account in case of total dissolution of the Partnership Agreement.
- Death. In the event of a partner's death, decisions on right of purchase by the surviving partner(s) or liquidation should be outlined here. If purchase is made, how the deceased partner's percentage is calculated and dispersed is included here.
- Arbitration. This section states how resolution will be made. It's best to set out which jurisdictional court will rule. If anything is missed here it will fall to the American Arbitration Association.
- Execution. After the Partnership Agreement is agreed upon, it must be signed by all parties, preferably notarized, and a copy given to each party.
Writing a Partnership Agreement protects the Partnership and its assets, giving each partner a definitive role to follow. The agreement entered into is legally binding and should be reviewed by a qualified attorney. It also can't hurt to take some business management or business law classes online so you're sure that you personally understand the agreement into which you're entering.