What Is the Purpose of a Partnership Agreement?
Partnership formation is simple and provides partners with the benefit of larger pools of capital, expertise and other resources. However, partnerships can also be a source of legal frustration and issues. Whether you intentionally form your partnership or your actions and activities imply partnership, a partnership agreement prevents internal legal issues.
Other People Are Reading
-
The Facts
-
Partnership agreements are a supplemental document, used in addition to any state government legal forms required for partnership formation. Although your partnership agreement is a very important document, you do not file it with your state. Partnership agreements spell out the agreed-upon method of managing and operating your business.
Significance
-
Partnership agreements spell out specifics of the business. Common elements of partnership agreements include the date the agreement is put into effect, the date the partnership begins business, the ending date of the partnership, if any, and the partnership name and nature of business to be conducted. Beyond the basic beginning elements, partnership agreements include the specifics for each partner, capital, profits and losses, salaries and draws, management, books and death or sale by a partner. These fundamentals are subject to varying legal ramifications by default if not addressed in your partnership agreement. Your partnership agreement affords you the opportunity to control how to address complex matters within your partnership, protecting all partners in the process.
-
Size
-
Partnership agreements are not limited to any specific length. The more information you include within your document, the better prepared you will be for future events. However, state statutes and federal laws prescribe your options. For example, you cannot state that each partner is only liable for decisions he individually approves. According to the Uniform Partnership Act, each partner is liable for his own actions, but is also liable for the actions of the other partners and employees (see References). For assistance with composing a partnership agreement, contact your local business attorney (see Resources) or the self-service forms form companies such as Nolo (see Resources).
Misconceptions
-
Individuals and businesses alike often make the mistake of not creating a partnership agreement before doing business together. Because of an existing strong relationship, partners cannot imagine the future holding anything different. Family-owned businesses rarely realize the need for a partnership agreement. Why do we need any such document? After all, we are family. Families, as any other business partners, are not immune to disagreements, or even legal action against each other.
Expert Insight
-
Partnership agreements have a profound impact on taxation of both the partnership and the individual partners. The partnership agreement determines the amount of tax partners pay and the type of payment and distributions of capital (see References). The IRS does not require a copy of this document, although if you are audited you will be required to provide a copy.
-
References
Resources
- Photo Credit calgrin: morguefile.com
