Partnership Agreement

Partnership agreements are written documents that explicitly detail the relationship between the
business partners and their individual obligations and contributions to the partnership. Since
partnership agreements should cover all possible business situations that could arise during the
partnership's life, the documents are often complex; legal counsel in drafting and reviewing the
finished contract is generally recommended. If a partnership does not have a partnership
agreement in place when it dissolves, the guidelines of the Uniform Partnership Act and various
state laws will determine how the assets and debts of the partnership are distributed.
RECOMMENDED ELEMENTS OF THE PARTNERSHIP
AGREEMENT
1. Name and address of partnership.
2. Duration of partnershipPartners can point to a specific termination date or include a
general clause explaining that the partnership will exist until all partners agree to dissolve
it or a partner dies.
3. Business purposeSome consultants recommend that partners keep this section
somewhat vague in case opportunities for expansion arise, while others emphasize clear-
cut and unambiguous entrepreneurial goals.
4. Bank account informationThis section should note which bank accounts are to be used
for partnership purposes, and which partners have check-signing privileges.
5. Partners' contributionsValuation of all contributions, whether in cash, property or
services.
6. Partners' compensationDetermine in detail how and when profits (and salaries, if
applicable) will be distributed.
7. Management authorityWhat are the operational responsibilities of each partner? Will
partners be able to make some decisions on their own? Which decisions will require the
unanimous consent of all partners? What are the voting rights of each partner? How will
tie votes be resolved?
8. Circumstances under which new partners might be admitted into the partnership.
9. Work hours and vacation.
10. Kinds of outside business activities that will be allowed for partners.
11. Disposition of partnership's name if a partner leaves.
12. Dispute resolutionStipulates what kinds of mediation or arbitration will be utilized in
the case of disputes that cannot be resolved amongst the partners. This is a way to avoid
costly litigation.
13. Miscellaneous provisionsThis portion of the agreement might delineate the
circumstances under which the agreement could be amended, for example.
14. Buy-Sell Agreement.
The Buy-Sell
Agreement The buy-sell agreement is one of the most important elements of any partnership
agreement. Lance Wallach summarized the problem in an article for Accounting Today: "Large
problems can result from the death, incapacity, resignation, etc., of one of the owners," Wallach
wrote. "How would the decedent's heirs liquidate the business interest to pay expenses and taxes?
What would happen if an heir or an unknown outside buyer of the decedent's share decides to
interfere with the business? Could the business or other owners afford to buy back the decedent's
ownership interests?"
A buy-sell agreement is intended to forestall all such problems. In essence, it specifies the terms
of a buyout in the event of death, divorce, disability, or retirement. The buy-sell agreement has
become a "must" in many instances in which a partnership is seeking financinga loan or a
lease. Lenders want to see the agreement and study its provisions.
The two primary structures for buy/sell agreements are cross-purchase agreements, in which the
remaining partnership owners buy the departing partner's stock or partnership interest, and the
stock-redemption agreement, in which the company buys the stock of the departing owner. Life
insurance policies are the more typical technique employed to ensure that funds are available for
cross-purchase transactions. With two partners in a business, the solution is very straightforward
but requires more ingenuity to set up with multiple shareholders. With stock redemption
agreements, on the other hand, the insurance would be written in favor of the company. One of
the benefits of a buy-sell agreement is that, with the partners able to reach agreement, more
innovative methods of solving the problem can be worked out and codified.