Two heads are often better than one. For entrepreneurs, this adage rings true, especially in forming business partnerships. A strategic alliance is a perfect opportunity for both parties to reduce costs, increase revenue, and potentially access a new market that could otherwise be difficult to penetrate.
That said, like any relationship, the success of a business partnership requires commitment and clear communication. One way to ensure this is by signing a partnership agreement. This paperwork sets both parties’ terms, responsibilities, and expectations to avoid conflicts.
By the end of this article, you’ll learn the elements of a partnership agreement, its benefits, and how to write one for your organization.
Partnership Agreement Definition
A partnership agreement is a legally binding contract outlining how two or more parties will work together on a business idea or project. It defines the responsibilities each partner will have, how much each owns, and the resolution for specific scenarios regarding the partnership, among others. Without such an agreement, misunderstandings may arise and jeopardize the partnership’s success.
Partnership Agreement vs. Operating Agreement
Because they generally help companies define how they operate, some may confuse the two. However, partnership agreements and operating agreements apply to different types of business structures: partnership agreements are used solely in partnerships while operating agreements are used in Limited Liability Companies (LLCs).
What should be included in a partnership agreement?
A legal partnership agreement should include clauses to address the following:
- Key business information;
- Responsibilities and roles of each partner;
- Capital contributions of the parties;
- Ownership and transfer of interests;
- Dispute resolution; and, if it comes to termination of contract,
- Business dissolution process (and the extent to which each partner will share in the partnership’s profits and losses)
It may also be customized to include other provisions, such as non-compete clauses, confidentiality agreements, or exit strategies. Tailoring the agreement to fit each party’s needs is essential to managing expectations and preventing misunderstandings or, worse, legal disputes.
How do businesses benefit from a partnership agreement?
As fast as the pace of change is, businesses need leverage to adapt quickly. A study done by BPI Network showed that 44% of businesses enter partnerships to gain fresh perspectives and ideas that help them stay competitive and relevant. A well-crafted partnership agreement provides that leverage and more, including:
- Setting expectations: Organizations can use the agreement to set clear expectations for daily business activities, such as duties, employment matters, or addressing unforeseen circumstances.
- Negotiating terms: It allows partners to negotiate terms that are favorable to them.
- Reducing misunderstandings: A written agreement serves as a reference, the single source of truth for the partnership’s technicalities, reducing confusion or disputes over business plans, compensation, or tax responsibilities.
How to Write a Partnership Agreement
As with any business matter, following the right steps is crucial to create a partnership agreement that is mutually beneficial for both partners. Specificities may be added in some partnerships, but generally, here’s how to write an effective partnership agreement:
1. Identify the partnership structure
First and foremost, make sure that you know who you are getting into business with. Learn their values, strengths, and weaknesses. This is a crucial step to help identify what type of partnership you want for your business venture. Common partnership types include:
- General Partnership: In this structure, all partners share equal responsibilities, profits, and liabilities.
- Limited Partnership: This type of partnership involves two types of partners: general partners who manage the business and have full liability and limited partners who only have liability up to their investment.
- Limited Liability Partnership (LLP): In LLP, both partners have limited personal liability to help protect their personal assets.
Once this is done, proceed with the draft by providing the essential details like business name, type of business entity, address of the main office, and start date if already settled.
2. Define the business purpose
What do you want to achieve by entering into the said agreement? Is it to expand the market? Acquire more customers? Leverage complementary strengths? Clearly state the vision and the end goal of the partnership and ensure that both parties are aligned with the shared objectives.
3. Outline capital contributions and ownership
Capital contributions, also known as paid-in capital, are the value a partner contributes, whether money, assets, or labor. Determine in this section how significant each partner’s contribution is and how these affect the percentage of ownership.
4. Describe profit, loss, and distribution arrangements
Decide how profits and losses will be shared. This can be based on each partner’s capital investment, ownership percentage, or other agreed-upon factors. Include compensation for services rendered, if applicable.
5. Specify roles and management structure
Clearly define the duties and responsibilities of each partner, specifying who handles the different areas of the business. For instance, who manages the daily operations, and who is the point person for financial oversight? You also need to outline the decision-making process, including voting methods and who has the authority to sign contracts or make key business decisions between the partners so that there is a clear and fair division of the responsibilities and accountabilities.
6. Set decision-making and dispute-resolution protocols
Decide how major decisions will be made (consensus, majority vote, etc.) and procedures for dispute settlements. This section should address whether day-to-day decision-making is the purview of an appointed partner or whether all the partners have to contribute.
7. Address exit strategy and succession planning
In this section, you need to mention the provisions a partner can use to exit the partnership, whether through sale, retirement, or other means. The agreement should also define how the business will continue to operate if one of the partners voluntarily or forcibly withdraws from the partnership or in circumstances when a partner dies or becomes incapacitated.
In cases, however, where a business dissolution is needed, partners should sign a new Partnership Dissolution Agreement that states a mutually agreed plan for asset distribution.
8. Ensure legal and compliance provisions
Consult a lawyer to make sure that the agreement considers local rules and practices, such as licensing, taxation, and insurance. Inclusionary clauses provide conflict resolution and legal and regulatory requirements applicable to the specific sector.
9. Sign and file the document
Once the agreement is finalized, a legal team will run it to ensure that it is legally sound and enforceable. Then, let involved partners sign the document and provide a signature date before filing it for approval.
In most states, partnerships are required to be filed with the government. As such, reach out to the secretary of state’s office and ask for the necessary papers to complete and submit the documents along with the drafted partnership agreement.
Simple Partnership Agreement Template
To guarantee the success of a partnership, the agreement terms must be communicated and aligned with all the parties involved. So, what does a partnership agreement look like? What should be included in a partnership agreement? This simple template provides the basics and may be a good starting point when creating your own:
PARTNERSHIP AGREEMENT This Partnership Agreement is made and entered into on [Date] by and between [Partner 1 Name], located at [Address], and [Partner 2 Name], located at [Address], hereinafter referred to as the “Partners.” IN CONSIDERATION OF and as a condition of the Partners entering into this Agreement and other valuable considerations, the receipt and sufficiency of which consideration is acknowledged, the Parties to this Agreement agree to the following: I. Business Name and Purpose The business shall operate under the name [Business Name], and its purpose shall be [Description of business]. II. Capital Contributions Each partner agrees to contribute the following amounts to the partnership:
III. Profit and Loss Distribution Profits and losses shall be shared in the following percentages: [Description of the profit-and-loss distribution] IV. Roles and Responsibilities
V. Financial Decisions All decisions regarding the operation of the business shall require unanimous consent of the partners unless otherwise specified. VI. Dispute Resolution In the event of a dispute, the partners agree to [Arbitration/Mediation] as a means of resolution. VII. Exit Strategy In the event that a partner wishes to exit the partnership, the remaining partner(s) will have the right of first refusal to purchase the exiting partner’s share. VIII. Legal Compliance The business will comply with all applicable local, state, and federal laws, including [specific licenses or insurance]. IN WITNESS WHEREOF, this Agreement has been executed and delivered in the manner prescribed by law as of the Effective Date first written above. Signatures: Partner 1 Name, [Date] Partner 2 Name, [Date] DISCLAIMER: This is a sample Partnership Agreement and is not intended to be a substitute for legal advice. It is best to consult a lawyer to ensure that this Agreement is suitable for your situation. |
Frequently Asked Questions on Partnership Agreement
Why is a partnership agreement necessary if partners trust each other?
Even if there’s trust, a written agreement is important to avoid confusion and ensure everyone is clear on roles, profits, and decision-making. As the business grows, having everything in writing helps prevent misunderstandings and gives a straightforward process for handling disputes or a partner’s exit.
In the absence of a well-structured agreement, partners may default to basic legal structures, like the Revised Uniform Partnership Act (RUPA). The problem here is that this framework may be functional in providing standardized governance for business partnerships in certain US states. Still, it does not reflect the parties’ unique demands for their organizations.
Can a partnership agreement be changed after it’s signed?
Yes, a partnership agreement can be changed if all partners agree. In such cases, any changes should be put into writing.
Who is responsible for overseeing the implementation of the partnership agreement?
The structure of the business determines who shall supervise the drafting of the agreement so that the interests of all the partners are safeguarded, and the laws are observed. In most cases, the board of directors oversees the entire process. Alternatively, one designated person or a committee may do the job.
Streamline Business Agreement Processes with Convene
Creating a well-thought-out partnership agreement can help prevent misunderstandings and ensure the partnership runs smoothly. However, the process of getting there can often be time-consuming and involve a lot of paperwork and back-and-forth communication.
Fortunately, platforms like Convene significantly simplify the creation of partnership agreements. From drafting and reviewing to securely storing and signing contracts, Convene lets partners manage documents efficiently, regardless of location. Centralizing communication and document management in a secure Document Library enhances transparency, reduces administrative burdens, and ensures smooth execution of the agreement draft.
Convene’s live video conferencing feature also allows partners to meet and discuss in real-time, while the integrated voting tools help partners quickly reach a decision by enabling them to send in their votes on key issues virtually.
Curious about how Convene can help your business through the partnership? Learn other key features of our board portal here or book a demo with one of our product experts today!
Jess is a Content Marketing Writer at Convene who commits herself to creating relevant, easy-to-digest, and SEO-friendly content. Before writing articles on governance and board management, she worked as a creative copywriter for a paint company, where she developed a keen eye for detail and a passion for making complex information accessible and enjoyable for readers. In her free time, she’s absorbed in the most random things. Her recent obsession is watching gardening videos for hours and dreaming of someday having her own kitchen garden.