What Is Partnership Agreement?

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This is a foundational document for partnership businesses and is similar to the operating agreement of a limited liability company or corporate bylaws. If an agreement does not exist between partners, disputes may result in expensive legal proceedings and unnecessary losses. This contract enables them to structure their relationship best suited to their business requirements.

Key Takeaways

Partnership Agreement Explained

The partnership agreement definition refers to a legal document that dictates how a partnership business will operate under two persons. It outlines the duties of all partners, how much profit or loss they are entitled to receive, and their ownership percentage. This business contract also addresses potential events that could impact the business, for example, the death of a partner.

The main purpose of this agreement is to have answers in writing to the common questions that may arise while carrying on a business to avoid any dispute among the partners. The state’s partnership laws govern the organization’s operations if no partnership agreement exists.

One must note that such laws offer standardized rules to resolve common problems. In other words, they are not customized to a business’s requirements. Hence, the standardized approach often results in something undesirable for the partners. For instance, a business’s dissolution or reformation must occur in case of a partner’s death.

This contract is common in the following industries:

  • TechnologyFinancingContractingMarketingLaw, etc.

To create such an agreement, all partners must sit down and decide who will have what responsibilities, how much each of them should contribute as capital, and how the allocation of profits or losses must occur. In addition, they must decide how to handle departing or new partners to avoid any future conflict.

If partners do not go through this exercise, they might assume they are on the same page. This misconception can lead to disputes in the future, which, in turn, can be the cause of failure.

Elements

Typically, the contents of partnership agreements must include the following:  

  • Business Address And Name: individuals must mention the partnership business’s legal name in the contract. Moreover, they must list all the business locations and specify the headquarters. Start Date And Purpose: In this section, one must provide a brief overview of a business’s products or services. Also, individuals must mention the date of commencing the partnership business. Profits And Distributions: Partners must detail when and how they should receive their compensation in return for their capital contribution and how they will receive profit distributions.Partner Information And Capital Contribution: The agreement must have the details of all patterns, for example, name and address. All partners must ensure that the legal document specifies their capital contributions and the nature of such contributions (cash, property, service, etc.).  Departure Or Addition Of A Partner: Over time, new partners might join the business, and an existing partner may leave the organization. The provisions of the agreement should deal with both situations.Death Of A Partner: Not making the necessary arrangements beforehand to deal with a partner’s death can lead to the collapse of a business. Hence, partners must decide and specify what happens about the business ownership structure if a partner dies or cannot continue running the organization.Roles And Responsibilities: Such an agreement must specify the roles and responsibilities of all businesses.

Individuals can look at a partnership agreement sample online to understand this contract’s elements.

Examples

Let us look at a few partnership agreement examples to understand the concept better.

Example #1

On December 14, 2022, Hyundai Electric and General Electric announced that they signed a partnership agreement to serve the offshore wind market in South Korea. Per the contract’s terms, Hyundai Electric will work as a manufacturing associate to localize the assembly of General Electric’s Haliade-X offshore wind turbines and generators.

According to Fabrice Kermorgant, the Chief Commercial Officer of GE Offshore Wind, this agreement will improve the company’s ability to cater to local customers’ requirements and help create substantial economic benefits. Moreover, the strategic collaboration will help form a local supply chain suitable for serving the expanding South Korean offshore wind market and potentially beyond the Asia-Pacific.

Example #2

Suppose John, Michael, and Jacob are three friends who want to start a partnership business to offer cleaning services. They must create a partnership agreement that mentions vital aspects concerning the business, for example, their capital contribution, duties, the share of profits and losses, provisions related to the death or admission of a partner, etc. This will help them avoid future conflicts that might lead to expensive legal proceedings or business failure.

Advantages And Disadvantages

The benefits and limitations of partnership agreements are as follows:

Advantages

  • Helps avoid a state’s default rules – The default rules of a state can restrict control and lead to the inequitable distribution of assets, profits, liabilities, etc. Having a partnership agreement can help partners avoid potential inequity.Clarifies management duties – Another key advantage of this agreement is that it sets limits on which partners have the authority over specific decisions. Thus, it prevents a partner from making any decision without approval.Minimizes money-related disputes – Since the agreement specifies partners’ financial contributions, entitlements, etc., it reduces money-related disputes.Helps avoid expensive legal proceedings and losses -When no partnership agreement exists, disputes may arise among partners, leading to heavy financial losses or costly legal proceedings. Partners can insert dispute resolution methods to settle potential disagreements without hassle when creating an agreement.Establishes an exit plan -This agreement states how each person can leave the business. Moreover, it also specifies the circumstances under which one partner can expel another.

Disadvantages

  • Registration of the partnership agreement in a court of law is necessary. The process involves paperwork. Moreover, it can be time-consuming.Partners could end up in court to settle a dispute, leading to unnecessary expenses.The terms of the agreement override state laws, which may not turn out to be favorable for the business.  General partners have unlimited liability.

Partnership Agreement vs Operating Agreement vs Shareholder Agreement

Individuals new to finance may find partnership, operating, and shareholder agreements confusing. To avoid any misconception, one must understand how they differ. In that regard, knowing their distinct characteristics is crucial. So, let us look at the critical differences between these three agreements.

This has been a guide to what is Partnership Agreement. We explain its elements, examples, advantages, disadvantages & comparison with operating agreement. You can learn more about it from the following articles –

Individuals can follow these steps to draft it:– Review their state’s rules for this agreement via the Department of State– Search for templates available online and customize them– Consult an attorney who deals with such business contractsAdditionally, all partners must ensure that these details are in the contract to avoid future disputes:– The organization’s name and establishment date– All partners’ names– Share of profits/losses among partners– Partners’ duties– The business’s purpose– Partners’ capital contributions, etc.One can take the help of a partnership agreement sample to know about the other elements of this contract.

No, having this agreement is not a legal requirement. However, it is advisable to have one to avoid future disputes among partners.

These agreements may dissolve automatically after businesses achieve their goal or when the period of existence mentioned in the agreement ends. That said, partnerships may also run indefinitely.

Usually, notarizing this agreement is optional. All partners only need to sign the contract to make it legally enforceable. However, doing so is a good idea as it can help prevent signature challenges.  

  • Subscription AgreementInvestment PartnershipPublic-Private Partnership