How Partnership Agreements Work

In "Financial Accounting: Tools for Business Decision Making," University of Wisconsin's Paul Kimmel and Jerry Weygant define a partnership as a business owned by two or more persons associated as partners. The benefits of forming a partnership include bringing together individuals of diverse and needed talents, pooling resources and creating financial incentives. Some examples of partnership enterprises include law firms, doctors' offices, and offices of architects and certified public accountants. Essential to the partnership is the written partnership agreement.

The Partnership Agreement

When forming a partnership, it is advised to establish a partnership agreement in writing. According to Smith & Roberson's "Business Law," 13th edition, a partnership agreement should include the firm's name and identity of the partners; the nature and scope of the partnership business; the duration of the partnership; the capital contributions of each partner; the division of profits and sharing of losses; the managerial duties of each partner; a provision for salaries, if desired; restrictions, if any, upon the authority of particular partners to bind the firm; any desired variations from the partnerships statue's default provisions governing dissolution and a statement of the method or formula for determining the value of a partner's interest in the partnership, if other than equal.

Partner Rights and Duties

A partner has the right to actively participate in management, choose associates and inspect the books. A partner also has fiduciary responsibilities with interests such as profit and property -- partners should also avoid competing with the firm to avoid conflict and possible lawsuit. Partners also owe each other a duty to act in obedience to the partnership agreement and to any business decisions properly made by the partnership, according to Smith & Roberson's " Business Law," 13th edition.

The Right Partners

A partnership can be rewarding, challenging, difficult, strategic, necessary and established for a variety of business or personal reasons. One important consideration is to be sure the partner(s) being considered have relatively common goals and generally get along. Dominant, obstinate personalities will eventually suppress debate, draining creativity and enthusiasm. Equally destructive to creativity is "groupthink," whereby constructive criticism is avoided in favor of quick consensus -- introducing a "devil's advocate" can produce better results if managed and supported properly.

Benefits of Structure

The partnership agreement outlines the duties, responsibilities and contributions of the partners. The formal structure also serves as a memorialized meeting of the minds whereby expectations of behavior and mission are established. Although not likely to be perfect, the partnership agreement will settle otherwise cloudy expectations early. With an agreed-upon blueprint, partners can focus their energy and creativity primarily on the development, growth and profits of the business rather than destructive disputes caused by unsettled differences in opinion or misunderstanding. Partnership agreements at the very least are an exercise in prudent risk management.

References

• "Financial Accounting"; Kimmel, Paul D., Jerry J. Weygandt and Donald E. Kieso; 2009
• "Smith and Roberson's Business Law"; Mann, Richard A., and Barry S. Roberts; 2006