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

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.