Partnership agreements are written agreements that detail the relationship between the business partners and their individual duties, obligations and expected contributions to the partnership. Since partnership agreements should, in the ideal, cover all likely possible business situations that could arise during the partnership’s life, the agreements could get quite complex. If a partnership does not have a partnership agreement in place when it dissolves, then the various state statutes would step in to provide a default scheme to distribute the assets and pay off the debts of the partnership.
Recommended Elements of a Partnership Agreement
- Duration of partnership – agreement could state a specific termination date or include a general clause explaining that the partnership will exist until all partners agree to dissolve it or a partner dies.
- Business purpose – some consultants recommend that partners keep this section fairly general in case opportunities for expansion into another industry arise, while others emphasize clear-cut and specific statement.
- Partners’ contributions – this should describe all contributions, whether in cash, property or services.
- Partners’ compensation -how and when profits (and salaries, if applicable) will be distributed.
- Management authority – this should deal with the operational responsibilities of each partner, their ability to make decisions on their own, if any, decisions that would require the unanimous consent of all partners, voting rights of each partner, and how deadlocked votes are resolved.
- Circumstances under which new partners might be admitted into the partnership.
- Kinds of outside business activities that will be allowed for partners.
- Disposition of partnership’s name if a partner leaves.
- Dispute resolution – whether mediation or arbitration will have to be utilized in the case of disputes that cannot be resolved amongst the partners, or whether partners would be allowed to resort to litigation.
- Buy-Sell Agreement.
The buy-sell agreement is one of the most important elements of any partnership agreement.
A buy-sell agreement is intended to forestall problems where a partner could suddenly find him- or herself in business with someone other than his or her original partner. In essence, it specifies the terms of a buyout, by either the partnership or the remaining partner, of the “departing” partners interest in the partnership, usually covering such events as death, divorce, disability, retirement, voluntary departure from partnership, or intent on selling the interest in the partnership to a third party (so called right of first refusal).
The two primary structures for buy/sell agreements are cross-purchase agreements, in which the remaining partner(s) buy the “departing” partner’s interest, and the redemption agreement, in which the company itself buys the interest of the departing owner. Buy-sell agreements also specify how the purchase price of the interest is determined, and terms of payment. Life insurance policies are the more typical instruments employed to ensure that funds are available for these buyout transactions.