How to Write a Business Partnership Agreement

Business partnership registration is between two or more individuals (or organizations) that create a legal relationship for conducting business via a written agreement and protect individual liability for the venture.

The business's structure, obligations, and responsibilities which the agreement between parties defines, are essential in ensuring the successful execution of this venture. Since each partner in the company is accountable for other partners' actions, professional legal knowledge is required right from the beginning. A properly drafted business partnership agreement in written form (also called "partner deed") safeguards each party and offers a fair method of settling disagreements and disputes. It provides the necessary procedures to modify the relationship or even dissolve the company entirely.

Benefits of partnerships

The parties to an agreement must be aware of the advantages and disadvantages of a partnership. Since business requires cooperation, expertise, and collaboration, the "pros" of the partnership may be many. The benefit of having partners includes having experts who can share the workload and the numerous tasks the business will have to tackle. Each partner brings their knowledge and experience to areas that positively impact the company's future, and together, they can reduce the time needed for critical tasks to be completed. Other partners may have experience managing a business and know how to deal with complex business or regulatory issues.

Another advantage is that financial matters concerning the business, such as resourcing, can be shared between partners and do not fall under the exclusive obligation of one partner. 

Additionally, administrative tasks can be assigned accordingly and distributed between partners. At the same time, business entity taxes could be avoided altogether.

Disadvantages of partnerships

There are drawbacks to any effort that involves business decisions to be made by more than one person, and if the agreement calls for unanimous decision-making, it can be a significant "con" to consider. While the requirements for unanimous decision-making are intended to shield partners from irresponsible decisions of the other, it's not unusual to have disputes or disagreements among partners. If conflicts are not quickly and amicably addressed, the business will most likely be impacted by the consequences.

In the context of a partnership, you're accountable for the conduct of other partners and don't have a shield of business liability to rely on. If one partner misconducts, all partners will share the consequences, and business debts could end up as individual responsibility. All of these drawbacks are important to consider when forming a business partnership. Lawyers must advise the parties on the advantages and disadvantages of partnership and proceed if both parties agree that a partnership is still the kind of business they would like to create.

Partnerships in various forms

The next step of your process would be determining the kind of partnership that best meets the partners' requirements. The three most common types of partnerships that are used are:

  • General Partnership (GP),

  • Limited Partnership (LP) and

  • Limited Liability Partnership (LLP).

1. General Partnership (GP)

The term "general partnership" refers to two or more people in a business who share the same management rights and responsibilities and are fully responsible for all obligations and debts incurred. This implies that a general partner has virtually unlimited liability for the company's debts and may be required to sell their personal belongings when necessary to pay off the debt.

2. Limited Partnership (LP)

A limited partnership permits partners to own financial interests in the business without managerial responsibilities. Since they don't exercise control over the business, they aren't personally accountable for the obligations incurred by the company. Therefore, the amount of any losses a restricted partner could incur is limited to the amount of investment the partner has made. A limited partner shares a lot of similarities with corporate shareholders.

3. Limited Liability Partnership (LLP)

An LLP is an alternative to the general partnership; however, in an LLP, all partners have limited liability in the way that they are not liable for the actions of other partners. 

The business structure offers legal protections to the partners since it's a hybrid between corporations and general partnerships. Some jurisdictions restrict LPs to certain professions, such as accountants, lawyers, doctors, etc. An LLP enjoys the same tax benefits as a partnership.

The elements that are essential to the Partnership Agreement

After the partners have decided to form a partnership, the next step is to draft the agreement for the business. Following are some of the essential elements of the partnership agreement

1. Name of the company, status, and the duration

It sounds easy, but it is important enough to include. The business's name, type of corporation, and the purpose of the partnership need to be listed.

Other pertinent information defining the location, nature, and function of the business and trademarks could be included. The governing laws and the jurisdiction in the case of a dispute can also be included in the first sections. If further information is required, the office's location and operation hours could be added, along with whether any licenses or permits are required to conduct business. The duration of the partnership may be defined in the contract.

2. Partners' liability

The responsibility of each of the partners must be specified in the partnership agreement. The type of partnership, as well as the status of the partner, determine the liability. In general partnerships, a clause could be read as: "Except as otherwise provided in this Agreement. Each General Partner shall be jointly and severally liable for the obligations and debts of the partnership."

In the case of a limited partnership, the clause may be read as: "no Limited Partner shall be liable for the debts, liabilities, contracts or any other obligations of the Partnership. Except as agreed upon by the Partners, and except as otherwise provided"

3. Control of the company/ Number of owners 

It's about the proportion of the partnership a person owns. It should be included alongside the contributions made by each partner when the company was founded. The result of equal contributions is usually equal shares, and different contributions require calculations to determine what percentage each owner owns in the company. Contributions can be either monetary or in-kind, like equipment, tools, or intellectual property.

4. Capital

Capital accounts show how much capital (ownership) each partner holds. The capital account reveals the beginning and later contributions made by each partner. The sample clause language could comprise this: "the capital of the Partnership shall be the aggregate amount of capital contributions made to it by the General Partners, and an individual capital account shall be established and maintained for each Partner and shall be credited with the amount of each partner's contribution to the Partnership." This includes "distributions, earnings and payments" paid to the partners.

5. Dissolution

The agreement should contain a method for dissolving the association. A suitable clause could be as straightforward as "the Partnership may be dissolved by majority votes at any time, in which case the Partnership will be liquidated, and the debts paid. All remaining funds will be distributed according to the ownership percentage stipulated in the Agreement". Additional criteria may be included to ensure accountability by an audit or other method if necessary.

6. Mechanism for settling disputes

A dispute resolution process is a must in all contracts, and a partnership agreement is no exception. One approach to reduce or eliminate disputes is to assign the responsibility of making decisions among the partners. Each of them has power over a specific section or part of the process. Settling disputes through a peaceful process is always the best choice, and taking legal action is usually the most undesirable option for a business. 

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