A partnership is an agreement between two or more people to engage in a business venture. Each partner agrees to contribute capital in the form of cash, assets, real property or effort to make the venture successful. Since partners share in the profits and losses of the company, preparing a partnership agreement setting out the rights and responsibilities of each partner is advisable.
Review the terms of the partnership. The partners should list the activities of the partnership, the responsibilities and duties required by each partner, how profits and losses are allocated and the duration or term of the partnership. Prepare sections in the partnership agreement specifically dedicated to each of these topics. For instance, when describing the duties of each partner or the purpose of the partnership, create sections called "Duties of Each Partner" and "Purpose," respectively.
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Determine how the profits and losses are allocated between partners. If each partner contributes an equal amount of cash and property to the company, then the partners may agree to share the profits and losses equally. However, if one partner contributes most of the capital and performs most of the work, equal shares may not be best for a lasting partnership. This is a critical component of the agreement and should be detailed in writing.
Explore additional issues that may arise to ensure additional protection against liability. It is important to determine which partners have the authority to enter into contracts with other companies or individuals. If a partner has the written authority to enter into contracts, then that partner has the authority to bind the partnership, which can subject the company to lawsuits. By preparing a clause in the partnership agreement that stipulates which partners have such authority, the other partners can protect themselves if a partner without authority attempts to bind the partnership. Also, the partnership agreement is not required to be a certain length. It is essential in a partnership agreement to express in written terms each of the partner's concerns, any anticipated issues that may arise, and established parameters of the business venture.
Sign the agreement. It is important that each partner reads the agreement thoroughly and discusses it with her own personal attorney. An attorney will review the provisions in the light most favorable to his client, ensuring that the partner is protected. Also, the attorney may anticipate concerns or issues that are not evident in the partnership agreement. Once the attorneys review the partnership agreement in its entirety and all amendments are agreed upon between the partners, the partners are free to sign.
Shàa Hudson is a corporate finance attorney and business consultant who specializes in mergers and acquisitions, private equity and other investment transactions. Hudson drafts and reviews investment contracts and provides advice on the risks associated with private placements and acquisitions. She received her Juris Doctor from the University of Iowa College of Law and has a Master of Laws in transnational business.