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Partnership agreements: What they are and how you create them.
Learn how business partners should outline roles and responsibilities.
A partnership agreement makes 3 things clear
- Who owns how much of a business.
- Who’s responsible for day-to-day operations.
- What happens if a business changes or dissolves.
What is a partnership agreement?
Businesses thrive day to day because of relationships with clients, vendors, suppliers, and customers. The internal relationships between the business owners (who own parts of the company) and individual partners (who usually have business obligations in addition to ownership) are just as important. Those relationships inform how the business works at a high level, how profits and debts are distributed, and how the business will grow and allocate resources.
Those relationships are formalized through a partnership agreement, which outlines the business structure, the allocation of partnership interest, and who’s responsible for what on a daily basis.
4 types of business partnerships.
Partnerships are almost always unique, and the specific terms vary. The laws of individual countries vary, but, broadly speaking, there are four major types of partnership agreements in the United States:
1. General partnerships
General partnerships are the most basic forms of partnership and one of the most common. All business partners in a general partnership have total liability, participate in managing the business, and have the ability to agree to business contracts and loans on behalf of the business. Ownership interests (i.e., how much of the business everyone owns) and profits in a general partnership are usually split unevenly, according to an agreement between the partners.
General partnerships are easy to form and dissolve. Much of the time, they dissolve automatically if one of the partners passes away or can no longer meet their financial obligations.
2. Limited partnerships
In a limited partnership (LP), some partners are general partners who are fully responsible for regular business activity. Other partners are limited partners. They provide capital contributions, but they’re not an active part of the business’s day-to-day operations or decision-making. An LP agreement will list who is who and make explicit the responsibilities of each partner.
3. Limited liability partnerships
Limited liability partnerships (LLPs) are less common than general or limited partnerships, and are not allowed in all states. In limited liability partnerships, partners are still responsible for regular business operations as well as debts and legal liabilities, i.e., responsibilities. However, they’re not responsible for errors made by other partners.
Limited liability partnerships are most common for specialized professional organizations. Doctors, lawyers, and accountants might all be members of a limited liability partnership arranged so that all members don’t have to be responsible for, as an example, bad business decisions or malpractice committed by one member.
4. Limited liability limited partnerships
Limited liability limited partnerships (LLLPs) are a newer type of partnership and not available in all states. For the most part, they operate like LPs but limit the general partners’ liability. Like in an LP, the general partners are fully responsible for the day-to-day running of the business, but they have liability protection just like the limited partners do.
What should a partnership agreement include?
The best way to prepare a partnership agreement is to hire a reputable attorney who will help you find what you need and craft the specific kind of legal documents you require for your enterprise. Many agreements include:
Buyout and dissolution clause
No partnership is forever. People pass away, retire, or move on. When that happens, it’s time for the remaining partners or outside parties to buy the absent partner’s shares.
Every partnership agreement should have instructions about what to do in the event of the death of a partner, what triggers a buyout, whether or not nonpartners can participate in a buyout, and how payments are distributed. Dissolution clauses can also include what happens to the partnership in the event of arbitration, e.g., bringing in a third party to help settle a dispute.
Noncompete clause
If a partner leaves, their former partners often won’t want them taking their knowledge, expertise, and inside information to the competition. Noncompete clauses prevent exactly that kind of exodus, and bar former partners from taking their talents elsewhere in the industry for a certain amount of time.
Some state laws don’t allow noncompete clauses.
Nondisclosure clause
This clause prevents partners from revealing confidential information and trade secrets to outside parties.
Provisions for hiring and expansion
Businesses grow. A partnership agreement needs to have provisions for who can hire employees, whether or not all partners need to interview or approve of new team members, and how a business will expand. A partnership agreement should also outline how partners will hire contractors, manage freelancers, and handle relationships with vendors and suppliers. An agreement also needs to explain how new partners can potentially join the enterprise.
Insurance
Partnerships need to have appropriate and adequate insurance in the event of fires, theft, disaster, and anything else that could open them up to liability. Sometimes they also require life or disability insurance for partners or employees, depending on the type of business.
Get partnership agreements signed faster.
With Acrobat Sign, everyone involved in a partnership can review and sign agreements fast.
Electronic signatures are a secure, legal, and efficient way to make sure every dotted line has the name it needs, and get business going quickly.
Plus, security measures — like password-protection for PDFs and identity authentication for signing — help keep documents secure so you can focus on running your business, and make your partnership flourish for everyone involved.
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