A Primer On Partnership Agreements
Every partnership should have a partnership agreement to ensure that both the partners and the business is covered no matter the situation
Going at it alone is an intimidating and challenging prospect. While many entrepreneurs do start by themselves, entering into a partnership with someone or another business does have its benefits. But before doing so, it is important to first have an understanding of how partnership agreements work.
Partnership agreements come in different forms depending on how you want to conduct your business. Here is a helpful breakdown on them:
PARTNERSHIP AGREEMENT:
A partnership agreement is a legal document that sets out all the terms and conditions agreed upon by the partners. More specifically this governs the relations between partners, how the business is conducted, the contributions of each partner, the distribution of profits and allocation of losses, and how the agreement itself is amended. It also includes the name of the partnership, term or length of the partnership, the type of partners in the partnership, mediation and arbitration, non-disclosure clauses, the principal office, and the governing law.
You have to be aware that partnership agreements are subject to state laws and each state has different requirements for the language in these agreements.
Some partnership agreements come with a default partnership status referred to as “partnership at will” which means that a partner can leave the partnership at any time, unless there is specific language within the document preventing this action.
LIMITED PARTNERSHIP:
This is a type of partnership agreement where the partners are divided into the following: general partners and limited partners. General partners own and operate the business, while limited partners only invest in the business.
Under this agreement, the general partner is the only partner that can be held personally liable for whatever may happen in or to the business, since they are the ones responsible for the daily management of said business. The limited partners, also called “silent partners,” hold no power over the operational decisions in the business nor are they subject to any personal liability for company debt or lawsuit. They simply invest and share the profits of the business.
LIMITED LIABILITY PARTNERSHIP:
Limited Liability Partnership (LLP) are similar to Limited Liability Corporation (LLC) in that they are a form of partnership that limits liability for partners or corporation more so than other partnership agreements. Essentially, partners are shielded from liability for the actions or debts incurred by other partners. It is a protection for the owners of a business and in some cases these also offer potential tax breaks and other advantages.
Entering into a partnership carries both pros and cons. In many cases, they can form a powerful and beneficial foundation for your business and carry you even further. However, it is absolutely crucial to understand how partnership agreements work and which iteration of them best works for your particular business. Remember to always have an attorney present when drawing up and signing such agreements.