Under common law, a general partnership is the most basic form of business arrangement between two or more partners. It's a simple understanding between parties about their respective duties and rights in a business relationship.
Many people looking to go into business together aren't sure about how to initiate the relationship. In many cases, a General Partnership Agreement is a good place to start. It doesn't provide some of the liability protection of other more encompassing agreements. However, some people find it to be a less threatening proposition.
A General Partnership Agreement is a contract between two or more parties (partners) that have agreed to go into business together. It establishes the responsibilities of each partner, sets the rules for profit and loss distribution, and informs other aspects of the business, such as capital contributions and financial reporting.
It's one of three basic types of partnership agreements. The other two are limited partnerships and limited liability partnerships. Each partnership structure differs in very specific ways, and they each respond to a different management structure. Some offer more or less protection for each partner's private assets.
The laws in some states also allow for other specialized forms of partnerships, such as qualified joint ventures and professional limited liability partnerships.
Depending on your state, a General Partnership Agreement may also be known as:
Partnership Agreement
Articles of Partnership
Business Partnership Agreement
Partnership Contract
Anyone entering into a business relationship of any kind should draft a written partnership agreement. You may want to choose a different structure than a general partnership, but it's smart to have a formal written contract.
To be clear, whenever you enter into a business relationship with another person or persons, you'll be in a partnership. You're not required to create a written agreement, but you have little control over the terms of the partnership if you don't have one. Without a written agreement, you're essentially defaulting your rights and responsibilities to the governing laws in your state.
Don't assume that your partnership is safe as a result of your relationship with the other partners. Partnerships between family members, friends, or complete strangers are treated equally under the law. The agreement simply spells out the guidelines for the partnership.
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Getting your partnership agreement right is crucial to ensure an amenable and profitable partnership. Disputes and disagreements between partners have the potential to ruin both businesses and friendships. With a written agreement, you can establish unambiguous rules that all partners can agree to.
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To create your document, please provide:
Effective date: The date the terms of the partnership begin.
Name and Purpose: The name of the partnership and its intended activity.
Place of Business: The location of the principal office of the partnership or where the partners will work.
Capital Contributions: How much and what each partner is contributing to the partnership in terms of cash, intellectual property, or other material contributions.
Distributions: How profits generated by the partnership will be divided. Typically, an arrangement of fixed percent distribution, equal share, or proportional to contributions is chosen.
Dissolution: How partnership assets will be divided in the event the partnership is dissolved.
Capital Accounts: The individual investments of each of the partners. They track contributions of the initial members of the partnership.
Severability: A provision that makes the agreement as a whole valid even if some of the terms are illegal or cannot be enforced.
Drawings: Money that the partners are entitled to remove from the partnership accounts in exchange for their work.
GAAP: Generally accepted accounting principles. A set of standards endorsed by the SEC for business and corporate accounting.
To be valid, a General Partnership Agreement must be signed by every participating partner. It does not need to be notarized, but doing so might be a good idea to prevent challenges to the signatures.
On its own, a partnership agreement does not actually establish a business entity. It only outlines the rules that will govern interactions between business partners. As such, it does not need to be filed with any state office.
However, some states require partnerships to apply for an employer identification number, whether they have employees or not. In most jurisdictions, you will also have to register the partnership with your state or local agencies if you use a name other than the names of the partners.
In any case, every partner should keep a signed copy of the agreement for their personal records.
Generally speaking, yes. As long as the name is not in use by any other business, you can use it for your partnership. It's also a good idea to search for any registered trademarks that might be similar. If your business name and category are too similar to another, you may be liable for trademark infringement.
In the purpose clause, you should aim to be broad enough to allow the partnership to expand without needing substantial amendments to the agreement. However, it should also be succinct in conveying the nature of the partners' business ambitions.
The partnership will dissolve if all the partners mutually agree to disband, or by operation of law (i.e. a judge orders the partnership to be dissolved). Additionally, you can specify whether certain events will cause the partnership to be dissolved, such as:
Your partnership agreement should have stipulations about the circumstances under which a partner can exit the partnership. Usually, this involves written notice to the other partners within a reasonable timeframe.
Yes, a partner may be forced out by reason of bankruptcy, or a majority vote of the remaining partners for reason of incapacity, incompetence, breach of fiduciary duty, criminal conviction, or legal judgment.
The answer to this question depends largely on the terms of the agreement itself. Depending on how you structure the agreement, one of three things may happen:
The partners make major decisions by majority vote. You may choose to have each partner have equal voting power or voting power based on their capital contributions.
Although the partners may handle the day-to-day decisions of the partnership, they may find it useful to appoint an individual or group to handle this task for them.
A joint venture agreement temporarily covers a contractual relationship between two individuals or businesses. This document is often created to develop a new project and ends when the project is completed. By contrast, a partnership agreement is more long-term, broader in scope, and involves shared responsibilities and liabilities of a business.
Generally, a partnership agreement does not need to be notarized — you only need to sign the document to make it legally enforceable. A witness may be helpful if the other party attempts to contest the document.
While a notary is not necessary, using one can help ensure that no one challenges any signatures later and is a secure way to firmly establish the effectiveness of your document.
A general partnership does very little to limit the partners' liability in the face of debt. In a typical general partnership, all members are equally liable for the debts incurred by the business. Moreover, if one or more members are unable to pay their portion of said debt, their liability falls on the remaining partners. Because all partners are agents of the partnership, they are all equally bound by contracts to third parties made by other partners.
The superior alternative is almost always mediation and arbitration instead of going through a court of law. It's a good idea to establish a dispute resolution clause within the partnership agreement that outlines this process. A mediation process is typically more expedient and much less expensive.
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