A partnership agreement, sometimes more formally referred to as “articles of partnership,” is a voluntary contract between two or more persons to share responsibility for a business when they agree to create a business or corporation together.
This agreement clearly defines the roles and responsibilities of both, or sometimes more than two, partners so that there is no confusion when going into business together. If you do not create a partnership agreement with your business partner, then the state could have more of a say in the legal matters involved in your business.
While it is not legally required for business partners to create a partnership agreement, it is highly recommended that you and your business partners create one, to avoid confusion. You also do not have to have the document in writing, but again, for legal and clarity reasons, most business experts and attorneys recommend putting the partnership agreement in writing, rather than just sealing the deal with a handshake.
How is a Partnership Agreement used?
Partnership agreements are used to specifically detail who has what rights and responsibilities involved in the creation and management of the corporation, including:
- Name your partnership. Get started on the right foot by agreeing to the name of the partnership/ business.
- Decision-making process and powers. Does one business partner make most or all of the decisions? If there are more than two parties, how are decisions made? What is the process for calling a meeting to make decisions? When can one party unilaterally make a decision, if at all?
- Capital contributions. How much money does each partner put toward the business? How much of that can/should they expect to get back, and in what amount of time? What will happen if the contributed money is not enough to start or maintain the business?
- Salaries/distributions. How is income distributed? What happens when the company moves into the black? When can partners take money out of the business?
- Bringing in new partners. If the business needs more partners, there are new interested parties, or one partner leaves and offers a replacement, how is this new party approved or denied?
- Resolving disputes. If a dispute arises between two or all parties in the partnership, how should this dispute be resolved? What types of disputes require formal resolution, or legal resolution? Are there disputes that could end the business agreement?
- Death or disability of one or more parties. What happens when one or more of the business partners become disabled to the point that they can no longer work, or die? Who takes on their responsibilities? What kind of financial help/contribution can the partner(s) expect from the company?
- What happens when the business fails? What happens when one partner wants to move on? What happens when both or all parties want to move on? What happens if the parties do not agree on management of the business or forward movement of the business?
You can specify all of these things and more by creating a clear, written partnership agreement that all parties sign. Download our free partnership agreement form to learn the basics of partnership agreements. If you have a complex partnership you wish to form, consider consulting an attorney for help.