Partnership is a business form that stakeholders often opt for when establishing their business entity. It offers them a fairly simple structure compared to the other types of business forms. On the other hand, it provides a higher level of liability and connection with the partner's personal property.
Partnerships are almost always formed between two or more partners who have different resources that they want to join together with the goal of creating a profit. Therefore, it is important that all their mutual relations are precisely defined and formalized within the partnership agreement.
What is a Partnership Agreement?
The partnership agreement is a legal document that establishes all the details about the structure and operation of the business partnership. It also provides the initial contribution of each partner to the business partnership and their rights and duties based on that contribution.
This document is usually created before the business partnership is established as a formalization of the agreement between the partners on how the partnership will be organized. This enables transparency between the partners and prevents potential disputes in the future.
The partnership agreement sample should include information about the partners, their initial investment, their management, voting, and profit-sharing rights, as well as their duties and liabilities towards the partnership.
The document becomes legally binding the moment all partners sign it.
Partnership Agreement Forms By State
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Partnership Agreement Types
Depending on the nature of their business and their specific business model, as well as the level of liability they want to have towards the business partnership they are establishing, the partners can choose between one of the following partnership agreement types:
Variety of Partnership Agreement
General Partnership (GP) Agreement: Here, all partners participate equally in the decision-making process. However, all of them have unlimited liability for the business partnership.
Limited Partnership (LP) Agreement: This is a partnership between one or more general partners that have decision-making powers and unlimited liability and one or more limited partners who don’t have decision-making powers but also have limited liability towards the partnership.
Limited Liability Partnership (LLP) Agreement: Here, all partners make decisions equally and are protected from the liabilities caused by other partners.
Limited Liability Limited Partnership (LLLP) Agreement: This is a partnership between general partners that have decision-making powers but also have limited liability, while the limited partners have limited liability but don’t have decision-making powers.
When is a Partnership Agreement Used?
The partnership agreement form is most commonly used when two or more parties decide to establish a business partnership. They will usually create this document before establishing the business partnership to define the rights and duties of each member of the partnership.
However, this document is also commonly used when partners seek opportunities for business expansion.
The potential investor will usually ask to review the partnership agreement document and see the structure and organization of the partnership before making a decision to invest. The same applies in the situation when the partnership applies for a certain loan from the financial institution.
What Information Should Be Included in a Partnership Agreement?
The partnership agreement template should include the following elements:
Mandatory Details in Partnership Agreement
Information about the partners: This usually includes the full names and mailing addresses of the partners within the business partnership.
Details on establishment and dissolution of the partnership: It includes the date of establishment of the business partnership as well as the date of its dissolution (if known at the moment of creating the partnership agreement).
Information on the initial contribution of each partner: This can be the financial contribution, contribution in equipment, know-how, and more.
Details about the business: Includes information on how the partnership will be organized, the business model, address, and business activities the partnership plans to conduct.
Description of each partner's rights and duties: This section provides details on each partner’s management, voting, profit-sharing, and other rights. Moreover, it also provides the duties each partner has towards the business partnership.
Information about the liabilities: Here, the document describes the level of liability each partner has towards the partnership. It can be an unlimited liability, where the partner is liable with all of their personal assets for the operation of the partnership, or a limited partnership, where the partner’s personal assets are protected to a certain extent.
Information about the accounts of the business partnership: It includes all the details about the accounts the partnership has with different financial institutions.
How Are Profits Taxed in a Partnership Agreement?
The partnership is usually taxed through a pass-through entity structure. A pass-through entity is a legal structure where the entity doesn’t pay income taxes at the business level. Instead, the profits and losses pass through to the business partners, who later report these items on their individual tax returns.
With all the partnerships (GP, LP, LLP, and LLLP), the income and losses pass through to the partners based on their ownership percentage in the partnership. On the basis of that, the partners later individually report their taxes.
Contrary to that, the limited liability company (LLC) can choose their tax treatment. They can choose the pass-through model or be taxed as a sole proprietorship, partnership, S corporation, or C corporation.
How to Fill Out a Partnership Agreement Form
Here, you can see the step-by-step process of filling out the partnership agreement form using our advanced and professional partnership agreement builder.
Step 1 - Fill out the Partnership Information
First, you will provide details about each partner forming the partnership by entering their full names and mailing addresses. Second, you should enter all the relevant information about the partnership.
This includes the registered address and the business activity of the partnership, as well as the type of partnership you wish to establish. This can be a general partnership (GP), limited partnership (LP), limited liability partnership (LLP), or limited liability limited partnership (LLLP).
Depending on the type of partnership you form, the partners will have different management rights, liabilities, taxation treatment, etc.
Step 2 - Explain Partner Capital Contributions
Here, you should enter information about each partner’s initial contribution to the business partnership. Most commonly, it is the capital contribution. Therefore, you should enter the amount of money the partner is investing in the partnership.
However, the contribution can also be in other forms, such as equipment or know-how. Here, the partners should also agree on the value of such a contribution since the contribution is usually connected with the shares the partner will have in the business partnership.
Step 3 - Explain Capital Accounts & Profit and Loss
In this section, you should enter information about the accounts the business partnership will use for their business operations. This includes the account number and the name of the financial institution where the account was opened.
Here, you should also provide detailed rules on how the profits of the partnership will be divided between the business partners. This is usually determined proportionally to their contribution to the partnership and the level of liability they have towards the partnership, but the partners are free to determine these rules in any way they like.
Besides profits, the partners should also define how the eventual losses of the business partnership will be covered by the partners. Here, the partners are also free to determine the system that is most suitable for them.
Step 4 - Add the Partners’ Liabilities
This section should include detailed information on the liability level of each partner within the partnership. This mainly depends on the type of partnership the partners decide to establish.
For example, with a general partnership, all the partners will have unlimited liability for the partnership with all of their personal assets. The limited partnership provides two categories of partners: general partners, who have unlimited liability for the partnership, and limited partners, who have limited liability for the partnership.
The limited liability partnership provides that every partner will be liable without limits only for the liabilities caused by their personal decisions within the partnership. The limited liability limited partnership provides that both the general and limited partners will have limited liability for the partnership's operations.
Step 5 - Explain the Management Structure
The management structure is also closely connected with the type of partnership partners decide to establish. With a general partnership and a limited liability partnership, all the partners will have equal management rights.
However, with limited partnerships and limited liability limited partnerships, the general partners will have more decision-making powers compared with the limited partners.
In a limited liability company, the partners can also decide to appoint a professional manager to manage the business operations, while the shareholders will have a more passive status within the business establishment.
Step 6 - Define the Changes in Partnership
Here, you should define the rules on how the ownership structure will change in cases of death, retirement, buyout, expansion, and more. The partners can agree upon certain limitations and priority rights for the existing partners.
For example, if one of the partners passes away or decides to sell their shares in the partnership, other partners will have the priority right to buy the shares of that partner.
Step 7 - Sign the Partnership Agreement Form
The last step in this process is to print the partnership agreement PDF from our builder and sign it. The partnership agreement becomes legally binding once all the partners sign it. Every partner should have one copy of the partnership agreement.
Although in most states, the partnership agreement doesn’t have to be signed to be legally binding, you should consider doing so, as the notarization additionally confirms the authenticity of the document.
The Importance of a Partnership Agreement
The partnership agreement is essential for the proper functioning of the business partnership. Below, you can see the most important benefits of having a partnership agreement.
#1. Partnership Agreement Helps Avoid Disputes
By creating the partnership agreement, partners formalize the most important details about the partnership, including the organization, rights and duties of each partner, liabilities, and more.
In this way, all the partners will be familiar with the rules of how the partnership is operated, which prevents potential misunderstandings and disputes between them. Even if a dispute appears, the partnership agreement will help facilitate a fast and easy dispute resolution.
#2. This Form Helps Prevent Unforeseen Tax Obligations
By having a partnership agreement, the partners will always know what their profit is within the partnership and what taxation method the partnership is implementing.
In this way, the partners will have relevant information on what the tax obligations of the partnership and the partners within the partnership are. This will prevent any violation of the taxation rules.
#3. It Bypasses the State’s Standard Partnership Rules
The federal and state laws provide certain rules for business partnerships. However, these rules are mostly general and provide only the basic guidelines on how a business partnership should be operated. The reason for this is that lawmakers want to give the partners the freedom to regulate their partnerships according to their specific business models.
By creating the partnership agreement, the partners will provide precise information on the business operation of the partnership and specify vague federal and state laws.
#4. It Presents Financial Information in Detail
By creating the partnership agreement and including financial information about the partnership, such as details about their accounts in financial institutions, the partners will provide transparency between the business partners.
These details are also important for any third party cooperating with the partnership, especially for the financial institutions that are deciding on issuing a loan or other financial incentive to the partnership.
Partnership Agreement FAQ
The purpose of a partnership agreement is to formalize the terms and conditions of the business partnership operation. It also defines the rights and duties of each partner within the partnership, basic information about the partnership, and the tax and liability status of each partner within the partnership.
The partners can exit the partnership under the conditions outlined in the partnership agreement format. This usually includes the voluntary exit with or without the buyout by the remaining partners, the dissolution or bankruptcy of the partnership, and more. The partnership should also provide rules in case one of the partners passes away or becomes incapacitated.
Yes, the partnership agreement is a legally binding document. In order for it to be legally binding, it must be signed by the partners, and the partners must have legal capacity at the moment of signing the document. Also, the partnership agreement must be in line with all the federal and state laws to be valid and, therefore, legally binding.
A difference between a partnership agreement and an operation agreement is that the partnership agreement provides rules of operation for the partnership, such as general partnership, limited partnership, and more. The operating agreement, however, is typically used to provide rules of operation for the limited liability company.
The key elements of the partnership agreement format are information about the business partnership and the partners that form the partnership, rights, and duties of the partners within the partnership, information about the accounts of the partnership, goals of the partnership, date of the partnership formation, signatures of the partners, and more.
The capital accounts are the individual accounts within the partnership that keep track of each partner’s individual contributions and withdrawals from the partnership funds. This is essential for the transparency of the partnership funds, especially for tax purposes, since all the partners within the partnership are taxed individually.