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:
Articles of Partnership
Business Partnership Agreement
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.
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