The secret to a successful business partnership is trust and honesty.
You can back that up with a legal document called a partnership agreement. It’s the best way to avoid disputes and disagreements between partners.
Read on to get a more comprehensive answer to the question “What are partnership agreements” and to find out why you may need one.
We’ll cover what partnership agreements are, the differences between them and operating agreements, what to include in one and the steps you need to take to write one.
What is a partnership agreement?
A partnership agreement is a legal document.
It outlines your liabilities and responsibilities and those of your business partners.
The agreement should detail how much of the business each partner owns and dictates how you run the business day-to-day.
Such an agreement is designed to prevent disputes from arising. If a dispute were to occur, it provides the means by which to resolve disagreements.
Another function of partnership agreements concerns the rules around if a partner leaves. It also covers the process of bringing in a new partner.
One key point in that partnership agreement definition is that it’s a legal document. Partnership agreements are contracts backed up by the full weight of the law.
If you come to write one, make sure you’ve had legal advice.
You may wish to involve a lawyer in the drafting of partnership contracts. Also, you can make life easier for yourself by using a partnership agreement template.
What is an operating agreement?
An operating agreement is similar to a partnership agreement. It’s a written agreement between members of a limited liability company (LLC).
Like a partnership agreement, it’s a contract.
An operating agreement covers how the business is run. It sets out the roles, rights, and responsibilities of each member of the LLC.
It generally contains clauses that govern the ownership, profits, exits, and sales of shares.
Partnership agreement vs. operating agreement: The key differences
There isn’t a huge difference between these agreements. Both contain clauses concerning the share of profits/loss, duties, and decision-making.
An operating agreement is for use by LLCs. In fact, it can be essential for LLCs that wish to retain their limited status.
Those who enter into an operating agreement for an LLC are known as members.
A partnership agreement is a flexible arrangement for business partners.
The terminology is different here. Each party to the agreement is called a partner.
Three types of partnership agreements
Partnership agreements are not one-size-fits-all kinds of arrangements.
You may have certain needs to take into account when drafting your own agreement.
Let’s examine three forms of partnership contracts that serve specific purposes:
General partnership (GP)
Each party that enters into a GP agreement shares equal liability. They’re each responsible for the business’s legal and financial obligations.
The business actions of one partner are seen as having been committed by the partnership as a whole. You can use a simple partnership agreement template to draw up a GP agreement.
Limited partnership (LP)
Here, one or more of the partners hold total liability and are called general partners.
Other partners have limited liability and are known as limited partners.
LP agreements suit businesses where one or more partners hold more equity than others.
Limited liability partnership (LLP)
LLP agreements are often used by medical practitioners, lawyers, or dentists.
They equally share business liability. It differs from a GP agreement in one way; it protects the partnership from a single partner’s conduct.
How and when you can use an LLP differs depending on your jurisdiction.
Obtain legal advice if you think this kind of partnership is right for you.
What is the main purpose of a partnership agreement?
Business partnerships are often formed between friends or family.
This can be the basis for a thriving company. Yet, things can get complicated when livelihoods are at stake.
A written partnership agreement is a great way to avoid disputes. It can also act as a guide for resolving problems when they occur.
Business decision-making can be a complicated process.
An agreement can set out how decisions are to be made. For example, who has voting rights on decisions can be defined in the text of the agreement.
With a legal partnership agreement, everyone knows their responsibilities upfront, and the requirements are reinforced by the law.
So, if you have one in place, you and your partners have an incentive to avoid breaching the agreement. Particularly as the consequences of not doing so can be costly, financially and personally.
In summary, the main purpose of a partnership agreement is to protect those entered into it. It also protects the business itself.
Without one, your business will be governed by the Partnership Act.
This is an inflexible set of rules that will make disputes more likely. It’s the default law that covers partnerships without an agreement.
If the disputes prove to be unresolvable, they could lead to the dissolution of your business.
Characteristics of a strong partnership
Before entering into a partnership, consider the people you’re teaming up with.
Yes, a written partnership contract can protect you financially. But what about the potential mental stress if things go awry?
Read this section to see if you have the basis of a strong partnership. From there, try to see if there are areas of your partnership you can improve.
1. Honesty
Partners must be honest with each other regarding all things business related.
If one partner isn’t pulling their weight, for example, the others need to say something.
Otherwise, resentment can build and reveal itself at the most inopportune time.
2. Trust
Honesty helps build trust. You need to be able to trust your partners.
Trust allows you to speak candidly with your partners about business matters. You can do so without worrying about ulterior motives.
3. Respect
Partners should understand each other’s strengths and weaknesses.
At the end of that process, they should still be able to see how each partner can contribute to the business.
4. Camaraderie
Businesses are often formed by family and friends.
Although this isn’t a requirement, at the very least you should be able to get on with your partners.
You don’t need to have a social relationship but be happy working toward the same goals.
5. Values
Successful companies hold their values dear and try to live them every day.
For this to happen, you have to be able to share a system of values with your partners.
It may be hard to reconcile a profit-at-all-cost mentality with an environmentally conscious one, for instance.
6. Complementary personalities
You and your partners should be different people who can bring something unique to the table.
For example, a bold approach from one partner may benefit from the input of a more cautious counterpart.
Take time to understand the potential strengths and weaknesses of your partnership.
Use what you learn to create a partnership agreement to suit your circumstances.
You can also use the guide above when considering a strategic partnership agreement.
This is when different businesses work together for their mutual benefit. In these cases, use the guide as it applies to organizations rather than individuals.
What should be included in a partnership agreement?
Now let’s look at how to write a partnership agreement; beginning by exploring what should be included in one.
There may be some things you wish to include that are missing here.
That’s understandable. Each business will have its own circumstances to consider. This guide covers what’s required in a simple partnership agreement.
A written partnership agreement should include the following basic information.
- The names of the partners
- The name of the business
- Contact details for the business
- Contact details for each partner.
Next, let’s take a closer look at the important features of a well-written partnership agreement:
1. Contributions
What will each partner contribute to the business?
This could be cash. It could also be property or services. For example, one of the partners may be supplying a truck for deliveries.
What will happen if the business runs short of cash?
Will the partners be obligated to invest more capital? If so, does the burden fall equally among the partners?
2. Ownership
In return for their contributions, how much of the business does each partner own?
Will it equate, in percentage terms, to the amount they contributed? Or will there be another arrangement?
It may be based on the role fulfilled by a partner with the business.
If they have more responsibility, they may be granted a larger stake.
3. Profit and loss
You hope that the venture will make you and your partners a lot of money.
But, it’s important to ask how that will be distributed amongst you and, if there are losses, will they be equally shared amongst the partners?
4. Decision making
Will you make decisions based on the majority? Or do you all have to come to a decision via mutual consent? If it’s based on a vote, do some partners’ votes carry more weight than others?
Make sure you have a robust process that gives minority owners a voice. That’s how to avoid disputes.
5. Day-to-day operations
Use your partnership agreement to define each partner’s roles and responsibilities. This should play to the strengths of each partner.
For instance, who’s the partner most adept with numbers? They’d probably be best suited to a financial management role.
6. Changes to the number of partners
How will you deal with a situation in which a partner wishes to leave? You need to decide how the equity share is divided amongst the other partners.
Would you be comfortable with them selling to an outside party? How will the new partner fit into the organization? How much should they contribute?
7. Death or incapacitation
It may be unpleasant to think about, but death or disability can happen. You, or one of your partners, may be unable to fulfill the duties of a partner.
You need to consider how to deal with this situation. If death occurs, what happens to the partner’s stake? If a partner is incapacitated, do they still have a share in the profits?
6 steps for writing a partnership agreement with PandaDoc
PandaDoc has the tools and templates to write a professional partnership agreement. Follow these six steps to create one today:
1. Get a free PandaDoc account
Sign up for a free PandaDoc account. It’s not just for partnership agreements. You can create, manage, and eSign all kinds of documents.
2. Choose a template
There are dozens of templates available to suit all sorts of businesses. If you’re a small business, choose the small business partnership agreement template.
3. Fill out the necessary details
Each template has fillable fields for details about the proposed business and partners.
Fill them out with the relevant information.
4. Customize the clauses
Templates come complete with clauses you can use. They are fully customizable, so you can adjust them to your needs.
5. Make it your own
A simple, no-frills template can get the job done.
However, there are options with images and colorful designs which are also fully customizable.
You can add your own images or select from the PandaDoc image library.
The image library is a premium feature, but you can access it with a free 14-day trial!
6. Sign
Once your agreement is complete, download it if you wish to print it. Alternatively, take advantage of PandaDoc’s eSignature software features.
You can then electronically distribute the agreement amongst your partners.
Is it possible to change a partnership agreement?
Yes, as long as all parties agree, you can change a partnership agreement.
You can use a partnership addendum to add, alter, or remove clauses.
If the change is to add or remove a partner, then refer to the clause concerning such actions.
Every partnership agreement should contain a clause dealing with adding or removing partners.
Write your partnership agreement and avoid conflicts with PandaDoc’s templates
PandaDoc’s template library contains documents for a plethora of business uses.
There are several fully customizable template options for your partnership agreement that make your’s and your partner’s lives easier.
That way, you can concentrate on building a thriving business together!
Find out more about how PandaDoc can help you create business-critical documents, by scheduling a 15-minute demo.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDocs services are governed by our Terms of Use and Privacy Policy.
