Drafting a simple partnership agreement forces you to discuss important issues with your partners upfront, which can help avoid confusion and misunderstandings down the road. Have one or more attorneys review your partnership agreement draft before all parties sign the document.
The initial section of a basic partnership agreement should identify the business and the people involved. RocketLawyer recommends that you include:
- Partnership name
- Names of partners
- Business address
- Agreement date, which is the date the partnership begins
- The partnership's primary purpose and business activity
- Partner signatures
Use a sample partnership agreement, like this one recommended by Entreprenuer.com, as a template to save time on formatting and writing.
Topics to Cover
Be comprehensive in your partnership agreement. The more topics and business elements you cover, the easier it will be to settle disputes when and if they arise. Address these elements at a minimum:
- Capital Contributions. Note how much capital each partner is putting into the partnership and the deadline for doing so.
- Ownership Percentage. This provision determines what percentage of the partnership each partner owns.
- Profit and Loss Allocation. You can allocate profits and losses based on ownership percentage or you can use another method.
- Salaries and Distributions. Identify which, if any, partners will receive salaries and how salaries will be determined. Also note if and when partners can withdraw capital from the business and any limitations.
- Management Roles and Decision Making. Note which partners will act in a management capacity. Not all partners need to take an active role in the business.
- Transfer of Ownership. Detail whether or not partners can sell partnership shares to other individuals. Also note what will happen to shares if a partner dies. RocketLawyer notes that a common provision is to allow the other partners to buy back the deceased partners' shares.
- Partnership Duration. Partnerships automatically dissolve when a partner dies unless the partnership agreement specifies otherwise. Consider adding a provision that allows partners to vote to continue the partnership in the event of the death of a partner.
- Partnership Dissolution. Note what type of vote is needed to dissolve the partnership.
- Partnership Accounting. Decide on a fiscal year end for the partnership and note whether accounting records will be maintained as cash or accrual.
- Dispute Resolution. Nolo.com suggests partners agree on whether they'll resolve disputes in court or use an alternative resolution system like mediation or arbitration.
You don't have to be a lawyer to draft the partnership agreement but you should get it looked over by one before you finalize it. An attorney is able to identify issues you may have missed, or rework troublesome statements.
To get a reasonable rate, management consultant Amanda Neville suggests partners get the agreement reviewed by a solo practioner rather than a big law firm. If you're not comfortable using the same counsel that your partner is using, Mark Kohler recommends obtaining your own attorney to review the document.
Finalize the Agreement
Revise the agreement as necessary according to your counsel's suggestions. Once all the parties are satisfied with the agreement, ask each partner to sign and date the finalized document. Make copies of the signed agreement for each partner's records.
Accounting firm Windes recommends that a business keeps a copy of the partnership agreement indefinitely.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.