5 Clauses Every Partnership Agreement Should Include
If you're thinking about starting a business partnership, it's important to have a partnership agreement in place to spell out each party's duties, financial obligations and legal liability.
Some states even require a partnership agreement to be filed along with business formation documents.
You can even complete these business formation documents from home with simple, DIY options customized for your state.
Here are five clauses every partnership agreement should include:
- Capital contributions. Your partnership agreement should explicitly state what contributions each partner will make to the partnership and the percentage of ownership interest they will each take. Cash is the most typical contribution, although property, securities, assets, and even certain skills can also be listed as valid business contributions.
- Duties as partners. One of the drawbacks of partnerships is the risk of unclear authority. For that reason, a large part of your partnership agreement should spell out the partners' duties. This includes specifying each partner's level of authority, business decision-making power, important management duties (not minor ones), and other responsibilities.
- Sharing and assignment of profits and losses. Allocation that is proportionate to each partner's ownership percentage is a popular way to allocate and distribute profits and losses. The agreement should also specify whether partners will be able to take a regular "draw" -- a withdrawal from his or her allocated profits -- each year, or whether the partners can take their entire allocated profits. This will depend on the partners' financial needs.
- Acceptance of liabilities. Depending on the type of partnership you're entering into, each partner may (or may not) be held personally liable for the business obligations of the partnership. As this can expose the partners' personal assets should the business become indebted and insolvent, it's an essential element to consider when forming your partnership.
- Dispute resolution. As with most business ventures, you should expect to have a "heated disagreement" or two with your business partners. Have a clause in your agreement that spells out how deadlocked disputes will be handled. For example, instead of allowing the partners to go to court, you could require that arbitration or mediation is used first.
Of course, these are just a few of the key clauses that should be included in every partnership agreement. Because partnership agreements can get complicated, it may be best to consult an experienced business lawyer who can help draft a legally binding agreement tailored to your exact needs.
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