A Partnership Agreement is also known as:
- General Partnership Agreement
- Partnership Contract
- Articles of Partnership
What is a Partnership Agreement?
A partnership agreement is a contract between two or more business partners that is used to establish the responsibilities, and profit and loss distribution of each partner, as well as other rules about the general partnership.
Who needs a Partnership Agreement?
Any two or more people who run a for-profit business together, including family (spouses), friends or colleagues, should have a Partnership Agreement.
Types of Partnerships
General Partnership: A general partnership is a business structure involving two or more general partners who have formed a business for profit. Each partner is equally liable for the debts and obligations of the business, as well as the actions of the other partner(s).
Limited Partnership: A limited partnership includes at least one general partner who has unlimited liability in the company and a limited partner who is only liable for his or her portion of ownership.
Limited Liability Partnership: A limited liability partnership is a type of partnership in which each partner is only liable for his or her own actions.
What is included in a Partnership Agreement?
The partnership contract includes information about the business itself, business partners, profit and loss distribution, as well as management, voting methods, withdrawal and dissolution.
Each partner receives a percentage of ownership based on his or her capital contribution.
Profit and Loss Distribution
As agreed to by partners, profits and losses can be distributed by:
- Fixed Percent: This number is a fixed percentage (e.g. 45, 55). The numbers must add up to 100% between all partners.
- Equal Share: Profits and losses are distributed evenly between partners.
Management and Voting
Partnerships can be managed by a designated managing partner or through majority voting by all partners.
Voting can be carried out through three possible methods:
- Proportional to Contributions: Voting powers reflect each partner's capital contribution.
- Proportional to Profit Share: Voting powers are assigned according to profit distribution.
- Equal Vote: Voting power is equal, and each partner is assigned one vote.
If the partner contract permits withdrawal, a partner may make an amicable exit so long as he or she is adhering to the notice period, probation period, and other terms specified in the agreement.
There are two forms of partnership withdrawal:
- Voluntary: A general partner decides to leave the business for personal reasons, such as retirement.
- Non-voluntary: A partner exits from the partnership against his or her consent, such as through incarceration or death.
Partners may indicate how assets are distributed between partners in the event of dissolution.
Potential ways a partnership may be dissolved:
- All partners agree on a specified end date
- All projects have been completed or the purpose of the partnership has been fulfilled
- Upon death of a partner
- Bankruptcy of a partner or the partnership
- A partner withdraws