Last updated May 24, 2022
What is a Partnership Agreement?
A Partnership Agreement is a contract between two or more business partners. The partners use the agreement to outline their rights responsibilities, and profit and loss distribution. The agreement also sets the general partnership rules, like withdrawals, capital contributions, and financial reporting. LawDepot's template allows you to create a general partnership agreement.
A general partnership involves two or more general partners who have formed a business for profit. Each partner is equally liable for the debts and obligations of the company and the actions of the other partner(s).
A partner doesn’t need to be an individual. A partner can also be a corporation or another business entity. It’s important to specify a partner’s legal status because it can have tax implications.
A Partnership Agreement is also known as a:
- General Partnership Agreement
- Partnership Contract
- Articles of Partnership
- Business Partnership Agreement
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.
A Partnership Agreement sets out guidelines and rules for business partners to follow to avoid disagreements or issues in the future.
Why is having a Partnership Agreement valuable?
A Partnership Agreement is valuable because it sets out each partner's rights and responsibilities. Further, it allows the partners to customize the law as it applies to their partnership.
Although it's perfectly legal not to have a Partnership Agreement, they come with their advantages. Without an agreement in place, your business is subject to the standard statutes on partnerships in your state. In the United States, 37 states follow the Revised Uniform Partnership Act, and it might have provisions that aren't suitable for your particular partnership or business. By creating your own agreement, you take control of the specifics and customize the applicable law to suit your company perfectly.
For example, a partner leaving the company will cause the dissolution (or end) of the partnership in some states. With a customized Partnership Agreement, you can include clauses to ensure that the default rule doesn't apply to your partnership. Instead, you can make it possible for the remaining partners to buy out the exiting partner's interest in the partnership.
What should I include in a Partnership Agreement?
Before you begin creating your Partnership Agreement, there are some crucial details about the partnership to sort out with your partners.
Have details regarding the following topics on hand when creating your document:
- Capital contributions
- Profit and loss distribution
- Management and voting
- Partnership tax elections
- Partnership withdrawal
- Partnership dissolution
How do I create a Partnership Agreement?
You can easily create a Partnership Agreement by filling out LawDepot's questionnaire. Using our template will ensure you complete the necessary steps:
1. Specify the type of business you’re running
Start the creation of your Partnership Agreement by specifying the industry your business is in and the type of business it is.
LawDepot’s Partnership Agreement questionnaire lets you pick from four types of industries:
- Retail
- Professional services
- Food and accommodations
- Arts, entertainment, recreation
- Other (if your business doesn’t fall under any of the industries listed)
Your business type can be described by the service you’re providing (e.g., bookkeeping, clothing store, dine-in restaurant).
2. State your place of business
Different states have varying rules and regulations for partnerships. Select the state you're operating in, and LawDepot will customize your Partnership Agreement to meet its requirements.
3. Provide partnership details
Include your partnership’s name and address in the agreement.
Before selecting a name for your partnership, it's recommended that you perform a business name search to avoid choosing one that sounds similar to another business in your industry. Business name registration laws prohibit businesses from having similar names because it can confuse customers.
Include the partnership’s address, city, state, and ZIP code in your agreement. The address is usually the location of your business’ main office or headquarters. You can use one of the partners’ home addresses if your business doesn’t have a premises.
4. State the partnership’s duration
State the date that the partnership will begin and how it will end, if you know. You can choose to end the partnership on a specific date or when the partners decide to dissolve the partnership.
5. Provide each partner’s details
Provide the name and address of each partner, and specify if they’re an individual, corporation, partnership, trust, or LLC.
6. State each partner’s capital contributions
Capital contributions are the amount of time, money or assets each partner gives to the business or partnership. The more a partner contributes, the more equity interest they'll have in the company. Each partner receives a percentage of ownership based on their capital contribution.
Specify the monetary value of each contribution in your Partnership Agreement. The capital contributions can come in the form of cash, equipment, time and effort (in place of cash equity) or in some other way (e.g., a free loan of a personal vehicle to partnership).
A Partnership Agreement can include non-monetary contributions as long as the partners can calculate and agree on the contributions' value.
Also, include the date that initial capital contributions are due.
7. Outline the admission of new partners
If you and your partners allow new members, specify how you'll decide on admissions to the partnership. LawDepot's Partnership Agreement template gives you the option of a majority vote or a unanimous vote of the partners.
8. Outline how a partner can voluntarily withdraw from the partnership
If the partnership contract permits withdrawal, a partner may make an amicable exit so long as they adhere to the agreement's notice period and other terms specified. If a partner wishes to withdraw, they can do so using a Notice of Withdrawal from Partnership form.
Our questionnaire allows you to set the necessary notice period at three months, six months, one year, or two years. It’s a good idea to set notices because a partner’s departure can have huge consequences for the business, especially in a small partnership.
You can also decide if a partner leaving will automatically cause dissolution of your partnership.
9. Determine terms for the partnership’s dissolution
Dissolving a partnership is a significant decision that may have varying consequences for each partner. It’s generally recommended that your partnership require a unanimous vote to dissolve it.
Some of the most common reasons partners may dissolve a partnership include:
- All partners agree on a specified end date for their partnership
- The partnership completed all its projects or fulfilled its purpose
- The business is no longer profitable
- The death of a partner
- The bankruptcy of a partner or the partnership
- A partner withdraws from the partnership
How the partners distribute the business’ assets on dissolution can factor into how each member votes in the decision to dissolve the partnership.
The options for distributing assets among the general partners are:
- Equal shares for each partner
- In proportion to capital contributions
- Fixed percent
10. Set rules for calling partners meetings
A partners’ meeting is when the members of a partnership come together to make critical business and financial decisions.
Decide if the partners will hold meetings weekly, monthly, quarterly, annually, or as required. You’ll also need to determine if special meetings can be called by any partner or a majority of partners.
11. Appoint a managing partner
A managing partner is responsible for the overall management and day-to-day operations of the partnership. They're also someone who has an ownership interest in the partnership.
Decide if a managing partner will be appointed or if all the partners will participate in managing day-to-day operations. You'll then need to decide if a unanimous or majority vote of the partners can remove the managing partner from their position.
Certain matters will still require a partners' vote even if the partners appoint a managing partner.
12. Determine the voting method
Partners are jointly liable for decisions made on behalf of the partnership, even if they weren’t involved or consulted. Some decisions can change the nature of your business, which can bring unanticipated risk to partners that aren’t as financially secure as the others.
When making decisions with a vote, you can give some partners more power than others. Determine if voting power is based on a partner's proportion of aggregate capital contributions, the proportion of profit shares, or if they'll all have equal voting power (one partner, one vote).
13. Decide which partners have signing authority
Any person who has the authority to sign contracts on the partnership's behalf can significantly impact your business and the rest of the partners. Decide if the authority to sign contracts will be given to any partner, a managing partner, or subject to a partnership vote.
The partnership must communicate any variation to the presumed authority of the partners to third parties, vendors, and business associates.
14. Outline which decisions require unanimous consent
Because some business decisions involve significant new risks for a partnership, it’s sometimes appropriate to require the consent of all partners in order to protect everyone’s interests.
Some decisions that might be better off with unanimous consent include:
- Assigning company check signatories
- Assuming new debts over a certain amount
- Incurring new expenses over a certain amount
- Selling a partnership asset over a particular value
- Hiring new employees where salary is over a certain amount
- Firing employees
- Releasing partnership claims except for payment in full
- Decisions affecting the unusual use or lending of partnership equipment
15. Determine how you'll make significant business and financial decisions
Determine if the partnership will make business and financial decisions with a unanimous or majority vote of the partners according to your chosen voting method.
Business decisions include all actions regarding the management, operation, and control of the partnership and its business. Financial decisions include distribution of profits, allocation of losses, and other financial matters.
16. Determine the method for distribution of profits and losses
Decide how the partners will distribute the profits and losses:
- Fixed Percent: A percentage of the profit and losses that doesn’t change. The numbers must add up to 100% between all partners.
- Equal Share: Profits and losses are distributed evenly between partners.
- In proportion to capital contributions: the share of profits and losses depends on how much each partner has invested.
17. Determine if partners will receive compensation
The members of a partnership have the option to compensate a partner as they see fit for services rendered to the partnership. The compensation is in addition to the regular personal cash withdrawals that partners can take from the partnership's earnings.
18. Address tax elections
Federal tax audit rules allow the Internal Revenue Service (IRS) to treat partnerships as taxable entities and audit at a partnership level instead of conducting individual audits of the partners. That means that depending on the partnership's size and structure, the IRS can treat the partnership as a taxable entity rather than auditing each partner individually.
Partnerships that have 100 or fewer partners and are not multi-tiered (i.e., which have no partners that are themselves partnerships, LLCs, or trusts) are eligible to elect out of the application of the rules on an annual basis partnership return.
Partnership agreements should address certain tax elections and choose a partner for the role of partnership representative. The partnership representative serves as the figurehead for the partnership under the new tax rules.
Law Depot's Partnership Agreement explains the rules clearly and allows you to:
- If eligible, choose whether the partnership wishes to elect out of the new tax elections. If the partnership elects out, they must renew this decision annually when filing tax returns.
- Make the partnership representative answerable to the partners in their dealings with the IRS.
- Elect to have each partner individually assessed for their share of the tax liability if an audit assesses a tax liability at partnership level.
19. Appoint a Partnership Representative
A Partnership Representative is appointed to act on the partnership's behalf with sole authority when dealing with audit procedures.
Suppose your partnership isn't eligible to opt-out (or chooses not to opt-out) of the tax audit rules introduced by the Federal Bipartisan Budget Act of 2015. In that case, the IRS can treat the partnership as a single taxable entity and deal with a single "Partnership Representative" at audit time.
The Partnership Representative is empowered to make all audit-related decisions on the partnership's behalf in dealings with the IRS. Individual partners no longer have statutory rights to be informed of dealings with the IRS.
Individual partners may no longer negotiate settlements with the IRS or make appeals against any settlement made between the IRS and the Partnership Representative. It's essential your Partnership Agreement clearly defines the role of the Partnership Representative and its accountability to the partners.
The Partnership Representative doesn't have to be one of the partners. Since the role has consequences for all partners, and the IRS doesn't have to notify partners individually, there could be problems if the partner-appointed Partnership Representative isn't available or is hindered.
Some partnerships may choose to appoint a tax attorney or accounting firm to the role to ensure continuity and expertise. Note that any representative you select must have a substantial presence in the United States.
20. Set a date for when the fiscal year ends
A fiscal year is a one-year period a company chooses to report financial information such as:
- External audits
- Federal tax filings
- Financial reports
A company's fiscal year doesn't need to start on Jan. 1 and end on Dec. 31. It only needs to be a 12-month period that allows a company to calculate its earnings from year to year accurately.
21. Outline what an annual report includes
In addition to the federal income tax report that’s automatically included in your annual report, your annual report can also feature the following:
- Income statement: the company’s financial performance
- Balance sheet: the company’s assets (including capital contributions) and liabilities (including any money borrowed from partners aside from their capital contributions)
- Cash flow statement: the amount of cash (and cash equivalents) coming in and out of the company
- Profit and loss summary: costs, expenses, and revenues gathered
The federal income tax report is already included in your annual report because each partner needs a copy for calculating their personal income tax.
22. State how disputes will be resolved
A time may eventually come when the partners clash with each other. Having a plan for handling disputes in your Partnership Agreement can help avoid costly litigation.
If you choose to have a dispute resolution plan to avoid going to court in your agreement, your options are mediation, arbitration, or mediation followed by arbitration.
Mediation is a negotiation between two parties guided by a neutral third party called a mediator. The mediator doesn't have the authority to decide on the disputing parties' behalf. Their role is to assist the parties in finding a resolution.
Arbitration is an alternative to going to court. The disputing parties agree to have one or more arbitrators act as a judge by reviewing any evidence and making a binding decision regarding their dispute.
23. Sign the Partnership Agreement
A witness isn’t necessary for creating a legally binding Partnership Agreement. However, it’s a good idea to have one in the event the execution of your agreement is ever challenged.
If you include a witness, they should be a neutral third party with no personal or business ties to you or any of the other partners.
Can I change or modify a Partnership Agreement?
Yes, it’s sometimes necessary to update the partnership agreement. A Partnership Agreement can be changed or modified at any time with the unanimous agreement of the partners.