What is a Partnership Agreement?

Business partnership agreements are like marriage – two (or more in the case of a business) individuals come together and agree to start up something and are willing to invest for the long haul. However like every relationship sooner or later opinions differ, circumstances change and problems occur. Your partnership agreement is your pre-nup. It is a document that states the nature of your business, the partners, what should happen in case of a dispute etc etc.

It is essential to set up a partnership agreement from the beginning as its your security blanket in times of turmoil.

What does a Partnership Agreement include?

Every business is different therefore so will what is included in their Partnership agreement. However here are a couple of things that generally appear on every partnership agreement:

  • The amount of money that each partner will contribute towards the partnership.
  • When profit starts to roll in how will it be divided and what will the salaries look like.
  • What are the roles and responsibilities and who will be assigned what.
  • Financial reports! Who’s going to do them?
  • How will bank accounts and funds be accessed by partners?
  • Should a disagreement arise what procedure will be installed to resolve the dispute?
  • An escape route for partners who no longer want to be partners or the steps in case the business is to be sold.
  • What rights will departing partners have if they want to start a similar business’
  • How much leg room (what rights) should be given to a departing partner who wants to start a similar business?

Types of Partnership Agreements?

When entering into or formulating a partnership agreement you should research what type of agreement would be best suited to your business.

There are two most common types of partnership agreement; general and limited. A general partnership is where the partners are hands on in their business. They manage the company and assume responsibility for the partnership’s losses among other obligations. A limited partnership is a mixture of general partners and investors (limited partners). The difference between the two is that limited partners while they have no say in the company like general partners they also have no liability unlike general partners.

How to know which one is the best for your business?

If you are wanting to start a small business with two or more partners who want to be elbow deep in the involvement of the partnership then usually a general partnership is the better choice. Limited Partnerships are more suited if you expect to have numerous investors within the partnership.

Advantages of a Partnership agreement?

A major advantage of a partnership is that it doesn’t pay tax on its income instead it “passes through” any profits or losses to the individual partners. The partners can then split the income in order to attract lower marginal tax rates and pass on tax preferred amounts.

Disadvantages of a Partnership agreement?

Specifically with general partnerships personal liability is a major concern. Partners are personally liable for the partnership’s obligations and debts. Also another disadvantage is that partnerships are more expensive to establish than sole proprietorships as they require more legal and accounting services.

If you and your business partner(s) are ready to go and a partnership is the right structure to suit your business needs, you can create a Partnership Agreement now.

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