Owning and operating your own business can be exhausting. With only one person at the helm, you are ultimately responsible for every aspect of your business. One way to lighten the load and gain some assistance is to bring on a partner through a partnership agreement.
What is a Partnership Agreement?
A partnership agreement is a legal business operation between two or more individuals who share the management and profits of the business. Any business that will be owned and operated by more than one individual can consider structuring the business as a partnership.
Types of Partnership Agreements
There are two main types of partnerships.
- General Partnerships
In this type of partnership, all partners are responsible for managing the company and taking responsibility for business debts and obligations.
- Limited Partnerships
In this type of partnership, there are individuals who run the business and have responsibility for debts and obligations (general partners) but there are also limited partners whose only stake in the business is monetary. Limited partners do not have control over how the business is operated and managed. For this reason, the scope of their liabilities are different.
General partnerships are more straightforward. Limited partnerships come with additional filing requirements and administrative demands.
Do You Need a Partnership Agreement?
There are many benefits to forming a partnership agreement. Consider the following pros and cons to see if your business could benefit from a partnership agreement.
One of the primary benefits to forming a partnership agreement is the tax treatment of the business. A partnership agreement is not subject to federal income tax. After partners calculate their partnership’s profits, each partner will file taxes for their share of the profit.
One concern for the partners in a partnership agreement is that their personal assets may be less protected from business liabilities. Generally, each partner has unlimited personal liability, and any debts incurred by the business are the responsibility of all partners.
For individuals who are concerned about the liability structure of general and limited partnerships, they could consider LLC formation. LLCs have similar tax benefits to partnerships but do not allow creditors to reach out to the pocketbooks of individual partners to satisfy debts.
How to Write a Partnership Agreement
A partnership agreement should include the following:
- Name: The formal name of your partnership.
- Contributions: What assets each partner brings to the business.
- Authority: States if partners can act without consulting other partners.
- Management: During day to day operation, who is doing what?
- Monetary Divisions: How profits, draws, and losses are distributed between partners.
- Decision Making Process: How are business decisions made? Is there voting and if so, does it need to be unanimous?
- Conflict Resolution: When partners disagree, what is the process for resolving and moving past disputes?
- Additional Partners: The process for bringing on additional partners.
- Removing Partners: The process for removing partners who want to leave or who have passed on.
Does a Partnership Agreement have to be in Writing?
A partnership agreement does not have to be in writing, but having a formal written version of the agreement is useful for navigating disputes or conflicts between partners. A written agreement does not require that you accurately remember all aspects of the agreement.
What is a Strategic Partnership Agreement?
A strategic partnership agreement is a partnership formed between two businesses instead of two individuals. It’s important to note that the partnership is mutually beneficial, and may include the sharing of resources for the betterment of both parties.
Forming a partnership agreement requires preparing and filing appropriate documents. Contact us today to find out how we can help.
Creating a Partnership Agreement by Bethanky K. Laurence for Nolo
Which terms should be included in a partnership agreement? By Melissa Horton for Investopedia