When multiple parties decide to go into business together, they’re not expecting their arrangement to generate disputes or difficulties. However, if they’re skilled investors, they will protect themselves with a partnership agreement anyway.
A partnership agreement is a written contract between all parties involved in creating a structured partnership business. It details the rights and responsibilities of each party and serves as legal proof of these terms in the event of a dispute.
Though there’s no legal requirement to sign such a document, if there’s a dispute and a business does not have a partnership agreement, party rights default to common law. To maintain control over the way their assets and liabilities are distributed, partnership structured entities are strongly encouraged to create a bespoke partnership agreement.
What Is a Partnership Agreement?
Every partnership agreement is different because every business is different. This legal document should comprehensively outline the terms of your business, including which party owns which assets, what responsibilities each party is required to fulfill, what percentage of profits each party receives, and what each is entitled to if they leave the partnership or the business is terminated.
It is particularly important to have a unique partnership agreement if assets, profits, and responsibilities aren’t split equally between all parties. The default decision – in lieu of a partnership contract – is to revert to an even split. It means partners might lose shares that haven’t been legally established and or gain shares they weren’t originally entitled to.
Include any details you feel are relevant to your partnership and ensure every party gets a chance to read the agreement before signing.
What Is a Partnership Agreement Template?
A partnership agreement template is a formatted document designed to be used as a guide when creating a partnership agreement. Some templates provide a formatted structure and layout only with blank spaces for adding your own content. Other partnership agreement templates are filled with hypothetical content that serves as an example of what to write.
Partnership agreement templates can be downloaded and edited to create unique legal contracts for your business.
Partnership Agreement Templates & Examples
Essential Elements of a Partnership Agreement
Here are some details you should include in your partnership agreement:
- The responsibilities required of each partner
- The percentage of the business owned by each partner
- The percentage of profits each partner will receive
- The amount of capital each partner is expected to provide
- The expected length of the partnership(s)
- How (if at all) to add new partners
- How to leave the partnership
- What happens if a partner dies or becomes incapacitated
- You should include any other terms and conditions you feel are relevant to your business partnership and its future. If you are unsure, consult with a business lawyer.
When to Use a Business Partnership Agreement
A business can defer to its partnership agreement during disputes over shares, profits, responsibilities, and/or capital contributions. If any party challenges the terms of their involvement in the partnership, the conditions set out in this contract may be considered definitive and legally binding.
The two most common disputes between partners are when (1) a party believes they are not receiving what they are entitled to receive and when (2) a party is accused of failing to contribute what they agreed to contribute. In either case, the partnership agreement should make it clear if there has been a failure of duty and to whom.
Another common scenario is when a partner dies, becomes incapacitated, or must leave the partnership for personal reasons. The partnership agreement explains what happens to their shares, profits, and contributions if they can no longer participate.
Why Is a Partnership Agreement Important?
There is no legal requirement to have a business partnership agreement. In lieu of one, the state steps in and splits all assets, shares, profits, and debts equally between partners. It’s a legal protection that prevents money from being stolen by any one individual in the event a partnership is dissolved.
However, it is not designed to be a bespoke solution, and a default agreement could end up imposing highly unsuitable terms. Here are some problems that might occur if your business does not have its own partnership agreement:
- All shares, profits, and debts are distributed equally and, thus, may not be proportionate to the amount of capital or work contributed by a partner.
- The partnership must indemnify any partner for liabilities incurred in the proper conduct of the business. This condition may not be suitable when partners expect there to be a limit on another’s ability to make certain capital commitments, or decisions of significance, without the consent of all co-signers.
- Every partner has a right to take part in the day-to-day management of the business, which may not be suitable if the partners originally delegated management to one individual.
- Unless expressly agreed (in writing), no partner can be removed from the business by majority vote. This would make it difficult to expel a partner even if they’d set up in competition against the business.
- Where no fixed term has been agreed for a partnership, any partner can terminate their involvement by giving. For some types of partnership, this could have disastrous consequences resulting in capital assets having to be realized.
FAQs about Business Partnership Agreements
What are some alternate names for the business partnership agreement?
A business partnership agreement (or just ‘partnership agreement’) is sometimes called a general partnership agreement or a partnership contract.
Who needs a partnership agreement?
All businesses owned by more than one individual are strongly advised to draw up partnership agreement documents. If there is more than one partner (even if all parties are related by blood or marriage), drawing up a legal contract is the simplest way to protect everybody’s interests, investments, and capital contributions.
Can I make my own partnership agreement?
There are no strict requirements dictating what a partnership agreement should say or define, but all conditions should be worded appropriately and the correct legal terminologies used. Otherwise, it is entirely up to the partners to decide what terms and conditions are outlined in their agreement. If you are unsure, there are hundreds of preformatted partnership agreement templates online.
What are four common terms that should be in a partnership agreement?
- Percentage of ownership
- Division of profit and loss
- Withdrawal or death
- Length of the partnership
How much does a partnership agreement cost?
Partners have the option to employ an attorney who can create a business partnership agreement on their behalf. Most attorneys charge between $100 to $300 per hour, and a relatively basic contract typically takes around 3 – 4 hours. The more complicated the agreement, the higher the cost. If this sounds too expensive, remember you also have the option to download a free partnership agreement template or pay a small fee to download a premium template.
How long does a partnership agreement last?
The partners determine how long their partnership agreement lasts by including an expiration date in the contract (known as a limited contract) or conditions that allow for the withdrawal or removal of partners. It is not uncommon for these agreements to have no expiration date, but this can cause disputes if the contract lacks clarification on how and when contributors can leave.
Can a partnership agreement be written or oral?
There is no legal obligation for businesses to draw up written partnership agreements. These documents are strongly recommended and have now become a standard practice but remain optional. This means oral agreements are just as valid as written agreements from a business perspective. Oral contracts carry the same contractual significance but can be much harder to prove.
Does the partnership agreement need to be notarized?
There is no legal obligation to have a business partnership agreement witnessed by a notary, but, again, it is strongly recommended. It’s just one more way of ensuring the contract’s conditions are binding and legitimately agreed upon by all parties.
It’s ultimately up to you and your business partners to decide how to create your partnership agreement. You can download an online template, create a bespoke partnership agreement from scratch or ask an attorney for advice. At a bare minimum, the document must include the term ‘partnership agreement’, the full names of all partners, some sections outlining the rights and responsibilities of these partners, and the date and signature of each signer.
Keep the original agreement document and a copy in a secure place in case of any future difficulties or disputes.