How to Draw Up a Partnership Agreement
An Internet search yields many sample partnership agreements. Most include the basic requirements: the name of the partnership and what it does, as well as boilerplate language that the partners may not truly understand or alter for their needs. However, the key to drafting a partnership agreement for a small business is for all partners to understand their business and its requirements, to know and agree to their personal responsibilities, and then to document those as clearly as possible to minimize future uncertainty.
- Difficulty:
- Moderate
Instructions
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1
Discuss the type of partnership you will have. There are a variety of types. A general partnership allows all owners to influence how the business is run and share in the business's profits. All general partners are personally liable for the partnership's liabilities. A limited partnership has two types of partners: general and limited. General partners manage the partnership and are personally liable for the business's liabilities. Limited partners do not participate in management and also are not liable for partnership debts. A limited liability partnership allows partners to work together collectively, but each partner is liable only for his personal actions; he is not liable for the acts of his partners.
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2
Familiarize yourself with your state's laws on partnerships. General partnerships can be informal and do not require any filed paperwork, but establishing a limited or limited liability partnership does require you to file paperwork with your state. All partnerships, whether state registration is required or not, are subject to the laws of the state where they are organized. These laws influence the responsibilities and rights of partners, so prior to drafting a partnership agreement, you should be familiar with your state's laws regarding partnerships.
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3
Clearly establish which positions, rights and responsibilities each partner will have. The rights and responsibilities of the partners will vary based on the type of partnership that is created and the individual capabilities and contributions of each partner. Before drafting and formalizing these responsibilities through a partnership agreement, you and all the partners should agree on these terms.
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4
Draft the partnership agreement. In addition to the type of partnership and the partners' responsibilities, include several other pieces of information. Provide the partnership's name and the location of the principal office. State when the partnership will begin operating and include the phrase "and shall continue until terminated." Describe the ownership percentage of each partner, how profits and losses are to be divided, how the partnership will make major decisions such as when to terminate the business, how to deal with individual partners leaving the firm, and how to resolve disputes between partners. Partnerships generally include arbitration clauses, or agreements to place all disagreements before an arbitrator, as the main means of resolving disputes. Save space at the end to date the document and for all partners to sign the agreement.
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5
Have all partners review the agreement, and revise if necessary. Some aspects that might have been clear to partners before may lead to disagreement when reviewed on the page. By providing all partners the chance to review the document, you can minimize the likelihood of future disagreements and ensure that all partners are aware of their formal responsibilities.
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6
Ask all partners to sign and date the agreement. This will make the agreement binding on all partners.
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Tips & Warnings
When drafting a partnership agreement, consider hiring a licensed attorney to ensure compliance with state laws and to promote clarity in the document.
