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How to create a Business Partnership Agreement (+ Free Template)

Summary

To prepare the necessary legal documents for your partnership, we recommend that you hire an attorney or use an online service like Rocket Lawyer. If you feel confident drafting your own agreement, and are looking to save money on legal fees, then […]

To prepare the necessary legal documents for your partnership, we recommend that you hire an attorney or use an online service like Rocket Lawyer. If you feel confident drafting your own agreement, and are looking to save money on legal fees, then download our free general partnership template. Follow the steps below for a basic partnership agreement.

Download your free template for a business partnership agreement here

Template for State-Specific Business Partnership Agreement

These are the 11 steps required to create a business partnership agreement.

Articles I-V: Basic Partnership Details

At the beginning of your partnership agreement, provide basic information about your business. Articles I-V of your partnership agreement should contain the name, address, purpose, and term of your partnership. This information is not required for general partnerships. However, it should be included in a signed partnership agreement that you keep with your business.

In the first paragraph of your partnership agreement, please list the names and addresses for your partners as a lead-in into Articles I through V. This information allows the public to see that your partners and you are engaged in business activities together, as you complete the articles.

Screenshot of the introductory information for the partnership agreement

These steps will help you draft Articles I-V of your partnership agreement.

Identify your Partnership State

The state where you will conduct business is your partnership state. The state you choose determines whether you can use a fictional name for your partnership, and the tax and laws applicable to your business. This information will appear in the title of your partnership agreement in Article I as well as in other places in your agreement.

Name Your Partnership

You can name a partnership after your partners, or you can operate under a fictional business name. To notify your partners that you are using the name, verify it isn’t in use. After finalizing the name, add it to Article II of your partnership agreement.

Screenshot of Article I of the Partnership Agreement – Formation

List the last names of each partner if you want to operate under their name. If you wish to operate under a fictional business name, make sure it describes your business and does not limit your products or geographic areas. Instead of “Northwest Ohio Fishing Lures”, choose “Midwest Outdoor & Fishing.”

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Identify a broad purpose

States do not require general partnerships to sign a partnership agreement. Therefore, your purpose statement does not have to conform to any state-specific requirements. It should be descriptive of the business and broad enough to allow for future growth. Article III should include a general purpose statement that allows for your partnership to grow without having to revise the agreement each time your business changes.

If the purpose of the partnership are to develop and own real property, and all other legal things that may be necessary to continue the partnership, it is broad enough to allow for growth and to include a wide range of real estate services. If your purpose is to operate a commercial farm, or “such other purposes and businesses as the partners may from occasion determine,” your partnership will have room for growth.

Screenshot of Article III of the Partnership Agreement – Partnership Purpose

Define your Partnership Term

The term of the partnership is the time that the relationship will last. This term begins with the formation of the partnership and can end at any point. In Article IV of your partnership agreement, include a start date and explain when the partnership can end.

If the partnership was formed to manage a single task, or project, you can specify a termination date. If you don’t want the partnership to end, then state that it will continue until the partners agree to disband it, or until the death of one partner, or until any other circumstances are agreed upon.

Screenshot of Article IV – Partnership Term

Find your principal place of business

The address at which you will conduct the business activities of the partnership is your principal place of business. This address should be on the street and not at the post office. Box. Box.

If you own a brick-and-mortar retail store, the address will be your principal place for business. If you run an e-commerce site, your principal place is the address where your employees and partners are located.

Screenshot of Article V of the Partnership Agreement – Place of Business

If you have a partnership already in place or are just starting out, our template is a good place to start. Rocket Lawyer can help you gather the information you need to start your partnership. Rocket Lawyer’s monthly membership fee is $39.99. Its On-Call attorneys can help you navigate the process of creating your partnership.

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2. Article VI: List and describe each partner’s contribution

Capital contributions by a partner are cash investments, physical assets, and other assets such as intellectual property that they contribute to the business operations of the partnership at the beginning. Capital contributions determine each partner’s share of the business. To establish a record of each partner’s capital account, list and describe the contributions of partner partners in Article VI.

Partners can contribute capital in the following ways:

  • Cash – This is the most popular type of contribution to partnerships. Many of your partners will likely make cash contributions as their initial capital contribution. In Article VI, indicate the value and specify if it is for specific expenses
  • Personal property – Personal property includes equipment and furniture. For example, a partner may donate kitchen equipment or furniture to a restaurant. In your partnership agreement, include the property’s value.
  • Real Estate: One of your partners can contribute real estate if your partnership has a physical storefront or brick-and-mortar location. In the partnership agreement, include the appraisal value, address, and other information.
  • Client list : Some partners use their client lists as a capital contribution. It can be difficult to assign an monetary value to such property, so don’t underestimate this contribution when assigning ownership rights. This type of contribution may occur if you own a real estate partnership.
  • Intellectual Property: Depending upon the type of business, partners might contribute intellectual property such as software code. If possible, estimate the contribution value based on similar intellectual properties or operational value to partnership. This is not a common form partnership contribution, but could arise in a startup or software partnership.

Screenshot of Article VI of the Partnership Agreement – Capital Contributions

About 50% of businesses that employ employees fail to survive beyond five years. Undercapitalization is a major cause of business failure. Partners underestimate the amount of money they will need and how successful they will be in their business. Understanding your business’ resources will be easier if you carefully describe the contributions of each partner in Article VI of your partnership contract.

3. Article VII: Determine Ownership Interests

In accordance with the agreement of the partners, business ownership can be divided among partners. Ownership often reflects the amount of a partner’s contribution. Ownership can be more difficult if the partner’s contributions are not easily valued, or if there are different roles and responsibilities for each partner. To describe the division of ownership in your business, use your partnership agreement.

If partners contribute in different ways, equal ownership is not appropriate

  • Cash or property: Partners who contributed significantly more money or property to the company should be considered. This will result in greater ownership and return.
  • Ideas – If one partner has the original idea or completed the first steps towards creating the partnership, then their ownership should be more than their cash contributions
  • Time Conflicts may arise when one partner works full-time while the other partners work part-time. Make sure that this is reflected in each partner’s ownership
  • Capital raises – Venture capital raised by partners is not a cash contribution but should be considered part of the partner’s ownership interest

Screenshot of Article VII – Interest in a Partnership Agreement

You should include all partner contributions and ownership interests in the partnership agreement. If they are not listed, you should add them elsewhere to your records and give them to each partner. An attorney can help you identify your partner contributions and establish the best ownership structure. If your contributions to the partnership are limited to cash or easily valued assets, you can use our template for a simple partnership agreement.

If each partner contributes capital, it can be simple to determine ownership interests. It can be difficult to determine ownership interests if you have more than one partner contributing. Rocket Lawyer’s monthly subscription plan is a good place to start a consultation with an attorney about the ownership structure of your partnership.

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4. Article VIII: Determine Profit and Loss Distribution

Partner do not receive a salary to fulfill their roles in the partnership. Profits and losses are usually shared among partners according to their ownership interests. To avoid any financial disputes between partners, include information about how profits and losses are distributed in Article VIII of the partnership agreement.

The distribution of profits and losses in a partnership is based on the percentage ownership. This method can be used if you specify in your partnership agreement that each partner must share in the profits and losses in the exact same proportion as their capital contributions or ownership.

These are the issues that affect profits and losses when drafting Article VIII:

  • Division – Decide how profits and losses will be divided among owners. For example, it is common to split profits and losses according to each partner’s ownership percentage or relative capital contribution
  • Calculation – Identify the method by which distributions will be calculated. For example, you might calculate distributions based upon a percentage of annual profits
  • Timing – Indicate when profits will be distributed to partners. This can be monthly or quarterly and so forth
  • Reinvestment in profits: Let the partners decide whether a percentage of the profits will go back into the business each month, or every year.

Screenshot of Article VIII – Profit & Loss in a Partnership Agreement

5. Article IX: Establish Voting Procedures

The voting procedures for a partnership specify how partners vote to decide the fate of the partnership. Your partnership agreement should include in Article IX whether there is a majority or unanimous vote. This section should also specify how much weight each partner will vote.

Article IX in your partnership agreement may require that the decisions of the partnership are made by a majority vote. Votes cast in the same percentage of capital contributions can be used to determine this. You can also require unanimous votes from the partners and give equal weight to each vote, regardless of ownership percentage or contribution.

Screenshot of Article IX of the Partnership Agreement – Voting

6. 6.

To ensure that you have a complete understanding of the business’s financials and comply with tax requirements, keep an accurate accounting of all day-to-day activities of your partnership. To describe the location of the partnership’s books, how partners should access them and how they should be reported to the partnership, refer to Article X in your partnership agreement.

The first section should state where the books of the partnership should be kept — typically at the principal business location. Article X should state that all partners should have access to the accounting records at all times. Lastly, partners must report all transactions in partnership accurately as soon as possible.

Screenshot of Article X of a Partnership Agreement – Accounting

7. Article XI: Get ready for new partners

Sometimes, businesses change and this can mean adding partners. Partnerships are built around the partners and the addition of a new partner can change the ownership structure. Even if there are no changes in your business plan, you should include procedures for adding partners to your Article XI agreement.

Article XI provides important information about new partners. This includes who can add new partners, how to adjust the responsibilities of partners and how voting will be affected. You can add new partners later if you wish.

Screenshot of Article XI-New Partners Partnership Agreement

8. Article XII. Define the Management & Authority of the Partnership

The partnership agreement should include details about your management structure and the authority of partners to make business decision. How day-to-day affairs of the partnership will be managed. Identify partner responsibilities, authority to borrow money, transfer assets, and so forth. To avoid any disputes about authority and management of partners, include this information in Article II of your partnership agreement.

It is crucial to determine what authority partners have to make business decisions. At the beginning of Article VIII, describe the rights of business partners to manage their activities. This protects the partnership from being held responsible for any unauthorized actions by its members. It also ensures creditors and other third parties are aware of the authority of each member to enter into agreements, borrow credit, and transfer assets.

A management committee, made up of multiple partners, can manage the day-to-day affairs and operations of partnerships. In your partnership agreement, you should include details about how many members will be included on the committee and how they will be chosen. Also, the authority of the committee. You may elect to have three members on your committee. These partners will be chosen by majority vote and have the authority to run all of your partnership business.

Screenshot of Article XII – Management & Authority

The following are some examples of commitments that a partnership agreement should address:

  • Partnership contracts Generally, any partner who has the authority to sign contracts for the partnership can sign a contract binding all the partners. You should limit your contract authority to those who have knowledge about the business’s needs.
  • Partnership debt – If your company has a credit card or loan, or any other debts, you should make it clear in your partnership agreement who can sign for these new debts. Each partner could be held personally responsible for any business debts that are not paid, depending on the structure you choose.
  • Partnership expenses: To limit the expenditures of partners for your business, you need to restrict who can make purchases without consulting with other partners. You can also set a limit on the amount of purchases that may be made without consent from partners.

To delineate the authority of each partner to sign contracts, open accounts, and commit the partnership to avoid contractual and financial obligations that aren’t in the best interests of the partnership, use Article XII from the partnership agreement. Limit the amount a partner can spend on the business to $50,000 to ensure that partners don’t waste large amounts of partnership assets on things they don’t need or want.

Rocket Lawyer’s Membership Plan is $39.99. It will help you choose how to manage your partnership and how to limit partner power. The On-Call attorneys from the firm can help you make decisions about how many managers to assign and how to select them.

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9. Article XIII: Termination Plan

A partnership agreement can be terminated at any time by the partners if it is in place. To specify how your partnership can end and how partners and assets should be handled upon termination, use Article XIII. You should include details on whether the business should continue to exist after a partner leaves.

A partnership can be terminated if there is no agreement. A partnership can be terminated by default rules if a partner dies or goes bankrupt or in other circumstances. You can control when and how your partnership ends by listing termination events in the partnership agreement.

Screenshot of Article XIII – Termination in a Partnership Agreement

10. Article XIV: How to resolve disputes between partners

Owning a small business means that there will be disagreements. Conflicts between partners can be particularly dangerous as if they are not resolved, they could cause your business to collapse from the inside. You can protect your business by including language in your partnership agreement that describes how and where disputes between partners should be resolved.

ADR (alternative dispute resolution) is one way to resolve disputes in partnership. ADR involves the use of a third party to come up with an agreement between partners. This includes mediation and arbitration. To resolve disputes without litigation, include ADR terms in your partnership agreement.

There are other options available for dispute resolution: giving the CEO final say, voting based upon ownership percentages, requiring majority votes for businesses with odd numbers of partners, or giving a specific partner the final say in certain areas of the business. You can handle disputes internally without consulting an ADR specialist by including language in your partnership agreement that describes your preferred dispute resolution methods.

Screenshot of Article XIV – Dispute Resolution

11. 11.

The requirements for filing a partnership agreement depend on the business and your secretary-of-state’s office. To determine if a formal filing for your partnership is required, you should familiarize yourself with the requirements of your state. In either case, ensure that all partners sign the partnership agreement and that each copy is kept for their records.

Screenshot of the page that is used to sign a partnership agreement

Additional Things to Add to a Business Partnership Agreement

You may have to add additional terms to your partnership agreement, depending on the business structure and partnership. You might want to describe the responsibilities of partners, how to deal with new partners, and what to expect during a sale. Additional terms should be included if you are planning on changing your business or have a complicated partnership.

You might also want to include the following items in your partnership agreement:

Responsibilities & commitments of partners

In general, partners work in different areas of the business. In the partnership agreement, you should list your expectations to facilitate an efficient organization of partner roles and responsibilities. Include details about vacation time allowances, work hours, and the ability of a partner to work outside the business in the partnership agreement.

Selling the business

Selling a business is often one of the most challenging tasks for partners. It’s important that you establish transfer procedures because disputes can arise from the sale of a partnership. You can use your partnership agreement as a guideline to determine who will manage purchase offers and whether partners have the right to force the sale.

You may need additional sections to describe the responsibilities of the partners, how to sell the business, and what to do if someone leaves the partnership. If you require more detailed terms, Rocket Lawyer is your best choice.

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How a Business Partnership Agreement works

A partnership agreement is a legal document which formalizes business operations. It also creates a contract between the partners. A general partnership agreement can also be used to protect the business from internal disputes and establish partner responsibilities. The agreement is not required to be filed by your general partnership. However, you should keep a signed copy in case of disputes.

These are the three types of partnerships:

  • A general partnership is the simplest form of partnership. It does not require any state filings, annual meetings, or ongoing state fees. A general partnership is created when partners join together for business activities. This article and the free template will help you to decide what should be included in a general partner agreement.
  • Limited partnership LPs are usually reserved for specific projects such as estate planning. This structure is required to file documents with the state. It offers limited partners liability protection. General partners are responsible for managing day-to-day business operations and have unlimited liability for acts or debts of the LP.
  • Limited liability partnership: Limited-liability partnerships (LLPs), which are more complicated, can only be formed by certain professional businesses that must be licensed under state law. LLPs do not protect partners from their own mistakes, but a partner’s personal property cannot be used to pay the LLP’s debts.

Partnerships are complicated legal entities. We recommend that you hire an attorney or use an online legal service to help you choose a structure for your business and file it with state. To get started, you can download our partnership contract template today.

For whom is a Business Partnership Agreement right for?

Partner agreements are legally binding agreements between business partners. Even though it is not required by law in every state, a partnership agreement can formalize the management structure of your partnership and protect it against internal disputes. To execute a partnership agreement, whether you are a partner or an LLP, consult an attorney.

Benefits of a Business Partnership Agreement

There are many benefits to having a binding partnership agreement. A partnership agreement, when drafted properly and signed by all partners, can help protect your business and prepare you for difficult management decisions. Before you begin drafting one for the business, be familiar with the benefits of a legally binding partnership agreement.

A partnership agreement has many benefits:

Avoid State Default Rules

States can impose default rules for partnerships without a signed partnership agreement. When a partnership is not in compliance with the rules, it can be terminated. Disputes within the company must be settled using default procedures. You can avoid default outcomes by creating a business partnership agreement that describes how profits will be divided, how the partnership may end and other important procedures.

Prevent & Resolve Disputes

Business partnership agreements, among other terms, describe who can vote for each partner and who can make business decisions. In the event of conflict between partners, partnership agreements include procedures for resolving it. To prevent your business’s failure due to disagreements between partners, have dispute resolution and avoidance terms in place.

Clarify your business structure

A business partnership agreement is a document that you and your partners create to outline the structure of your business. A partnership agreement outlines the rights and authority of each partner and helps to make the partnership run more efficiently. To give structure to your business, include the expectations and responsibilities of each partner in the partnership agreement.

Facilitate business transition

If a partner dies, becomes incapacitated, or leaves the partnership, transitions may occur in your business. If your partnership agreement does not provide for alternative arrangements, the default state laws will automatically dissolve the partnership upon death or bankruptcy.

 

There are drawbacks to a Business Partnership Agreement

A business partnership agreement protects your business from management problems and internal disputes. It can be costly to hire an attorney to draft the agreement. Partner authority may be restricted and decisions delayed by a partnership agreement. You can download our partnership agreement template for free and use it to choose broad language that does not limit the authority of your partners more than is necessary.

A business partnership agreement has its downsides:

It is expensive to draft

It can be costly to have a lawyer draft legal documents for your company. To create a simple partnership agreement, use our template. Or check out Rocket Lawyer’s monthly subscription plan to save on legal fees.

Restrictive Language

You can limit the behavior of partners by defining your management responsibilities, voting structure and profit distribution. While this is generally a positive aspect of a partnership agreement it can limit flexibility in business operations and slow down decision-making by limiting the authority of partners.

The bottom line

When two or more partners agree that they will enter into a business together, a general partnership is formed. Although a formal filing is not required for a simple partnership, you should sign a partnership agreement to formalize the business structure. To protect yourself and your business, include terms such as partner contributions, dispute resolution methods, and profit sharing.

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