Drafting a Partnership Agreement

Partnership Contracts Should Reflect Wishes, Comply With Laws

Jul 20, 2008 Terence P Ward

Creating a business partnership can be as easy as a handshake in the United States, but a written agreement will serve all parties better.

Partnerships are businesses where all owners share in the profits and losses of the enterprise. The ease of creation and simplicity of regulation make them attractive for new businesses. Additionally, they can be dissolved more easily than corporations. Many of the disadvantages of the partnership structure can be minimized by carefully drafting the partnership agreement.

Benefits of a Written Partnership Agreement

The simplest form, the general partnership, can be formed "on a handshake," according to Michael Spadaccini in The Legal Ins and Outs of Forming a Partnership (Entrepreneur.com). However, a number of questions that may not arise until many years later can be discussed in advance, if a written understanding of the partnership is laid out.

• Ownership. Do all partners own the partnership equally? Generally ownership, and voting rights, are proportional to the amount of capital invested.
• Management. Partners all have authority to bind the partnership into agreements, unless the partnership contract stipulates otherwise. It's important to lay out what types of decisions a partner may make unilaterally, and which ones require a vote. Laying out the signing authority for any bank accounts is another critical element.
• Liquidation. Partnerships may automatically dissolve if a partner dies without an agreement laying out an alternate course. Procedures may also include circumstances for buying out a partner, and conditions under which new partners may be added.
• Conflict Resolution. If things go south, it's not a bad idea to have an agreed-upon third party (or method of determining one) laid out in writing, in advance.

Uniform Partnership Act

According to AllBusiness.com (What Should You Include in a Written Partnership Agreement?, 2007 Yahoo! Small Business), the UPA "lays out basic partnership-agreement stipulations" and "comes into play when a partnership encounters problems that its written agreement doesn't cover." However, it was never adopted in Louisiana, and since it was originally enacted in 1914 it has been amended several times. Thirty-five states use the most recent version.

The UPA is a good resource when drafting a partnership agreement, defining the default assumptions about partnerships and detailing how much a partnership agreement can modify them. According to Spadaccini, this ability to modify the legal requirements can be significant: "For example, state law typically dictates that a partnership's profits are to be divided among partners in proportion to their ownership interests. However, the partners are free to divide profits by a formula separate from their ownership interests, and the decision of the partners will override state law."

Seek Legal Advice

Putting ideas down in writing, or hiring a third party to do so, is sound business practice. Before signing any partnership document, however, it's a good idea to have a business attorney look it over, to make sure it says what it's intended to say.

The copyright of the article Drafting a Partnership Agreement in Technical/Business Writing is owned by Terence P Ward. Permission to republish Drafting a Partnership Agreement in print or online must be granted by the author in writing.