What is a Partnership Agreement?
A Partnership Agreement helps you and your partner specify obligations and contributions of each one of you and how you would like your jointly owned partnership business to work. This agreement helps you address key business situations such as:
- what is the nature of the business
- how profits (and losses) would be distributed
- how much money each partner would contribute to the business
- how to add new partners / how to transfer share of a departing partner
Why I need to write Partnership Agreement?
A partnership doesn’t need to have a written agreement, in the absence of which the provisions of one-size-fits-all statues of governing Federal and State partnership laws would apply. That’s why it’s best to put the agreement in writing, addressing key business situations and terms.
With a written agreement, all the partners know upfront what their obligations and contributions are, which considerably reduces chances of disputes later. Even in case of dispute, you have an agreed way of how to resolve those disputes without going through costly and time consuming litigations.
Partnership = Unlimited Liability
Unlike incorporated firms, a partnership firm doesn’t have a separate legal existence. This means partners are jointly and severely liable for the debts of the partnership firm.
Even on withdrawing from the partnership firm, each partner remains liable for existing debts as well as future debts, unless a proper notice of retirement is published.
Checklist: Key Elements of Partnership Agreement
- Business purpose: What is the nature of business of partnership firm? You may want to keep it somewhat broad in scope to accommodate for any opportunity to expand your business.
- Contribution of partners: What will each partner contribute – capital, property (example – intellectual property, physical office etc) or services (example – providing marketing service to the partnership firm)
- Compensation of partners: Will each partner get salary? Will anyone get interest on the capital he has contributed to the business? In what proportion profits (or loss) would get distributed and at what frequency?
- Management structure: What are operational responsibilities of each partner? Can each partner take decisions on his own (example – hiring/firing an employee)? Will some decisions require unanimous consent of all partners (example – expansion to a new geography or adding a new product line)? If yes, what are the voting rights of each partners and how will tie votes be resolved?
- Dispute resolution: How will disputes between the partners be resolved – mediation, arbitration or formal legal proceedings, which might be very costly to each partners and the partnership firm?
- Change in partners: Can new partners be admitted? Will a departing partner be able to sell his shares to outsiders and, if yes, will remaining partners have right of first refusal?
Sample Partnership Agreement
The sample agreement below covers the basics of a Partnership Agreement. Depending on your business goals, and complexity of terms for partnership, you may want to add or revise appropriate clauses to customise this agreement for your particular situations. You may also ask for our expert lawyers’ help in drafting and reviewing your partnership agreement.
This Partnership Agreement (this “Agreement”) is made and entered into this _ day of __, 20 (the “Effective Date”), by and between:
of the following address:
of the following address:
(referred to herein as “Partners” or individually as “Partner”)
The Partners intend to work together in a business.
This agreement governs terms and conditions that governs the relationship between the Partners.
IN CONSIDERATION OF and as a condition of the Partners entering into this Agreement and of the mutual benefits and obligations contained hereinafter, the sufficiency and adequacy is hereby acknowledged, intending to be legally bound, the Partners each respectively agree as follows:
By this Agreement, the Partners hereby agree enter into a general partnership (the “Partnership”) in accordance with the laws of The State of New York. This Agreement will be interpreted in accordance with the laws of the State of New York and the Partners hereby agree to be the subject of the laws of the State of New York.
2. NAME AND BUSINESS
The Partnership will be named _________________.
The Partnership is established for the following purpose __________________, and any other type of business that the Partners may agree from time to time.
The principal place of business shall be (address/city/state) and any other place or places that the Partners may mutually agree upon.
3. TERMS OF PARTNERSHIP
The Partnership shall commence on ____________________ and shall continue until terminated by law or in accordance with this Agreement.
4. CAPITAL CONTRIBUTION
(i) Each of the Partners has contributed to the capital of the Partnership, in cash or in property, goods or services in agreed upon value, as follows (the “Capital Contribution”):
|$_______ (USD)||Marketing service|
(ii) Each Partner would submit his Capital Contribution fully and, on time, no later than _________________.
(iii) All Capital Contributions are final unless any Partners give written consent of withdrawal.
5. INTEREST ON CONTRIBUTED CAPITAL
No loan interest or any borrowing charge will be due or payable to any Capital Contribution that any Partner makes to the Partnership
6. CAPITAL WITHDRAWAL
Capital may only be withdrawn from the Partnership if all the Partners express written consent to such withdrawal.
7. ADDITIONAL CAPITAL
(i) According to the requirement of the Partnership, Capital Contribution may be amended from time to time (the “Additional Capital”), provided that the interests of the Partners are not affected, except with the unanimous consent of the Partners. No partner will be required to make additional Capital Contribution. Whenever additional capital is determined to be required and an individual Partner unable or unwilling to meet the additional Capital Contribution within a reasonable time period, as required by Partnership business obligations, remaining Partners may contribute in proportion to their existing capital contributions to resolve the amount in default. Accordingly, the allocation of profits or losses will be adjusted to reflect the aggregate change in Capital Contribution by the Partners.
(ii) Any advance of money to the Partnership by any Partner, in excess of the amount provided for in the Agreement or subsequently agreed to as Additional Capital, will be deemed a debt owed by the Partnership and not an increase in Capital Contribution of the Partner. This debt will be repaid with interest at rate and duration that will be determined by a majority of the Partners. This debt will not entitle the lending Partner to any increased share of the Partnership’s profits nor to a greater voting power. Such debt may have priority or preference over any other payments to Partners as may be determined by a majority of the Partners.
8. CAPITAL ACCOUNTS
A separate capital account (the “Capital Account”) will be maintained for each Partner with their initial capital contributed to this account. Any subsequent Additional Capital contributed by any Partner will be credited to that Partner’s Capital Account.
9. FINANCIAL DECISIONS
Any decisions regarding distributions of profits or losses or regarding requirements for Additional Capital or any other financial matters will be taken by a unanimous vote of the Partners.
10. INTEREST AND OWNERSHIP
The Partners ownership interest in the Partnership will be as follows:
|Partner 1 Name||50% (Fifty Percent)|
|Partner 2 Name||50% (Fifty Percent)|
11. PROFITS AND LOSSES
The net profits and losses of the Partnership for both accounting and tax purposes, subjected to other provisions of this Agreement, will accrue to and be borne by the Partners in equal proportion (the “Profit and Loss distribution”) and will be distributed monthly, on the first Monday of the month. Each Partner will be responsible for his own taxes on any distribution made. The profits and losses will be accounted by a to be determined accountant for the Partnership.
Accurate and complete books of account of the transactions of the Partnership will be kept in accordance with generally accepted accounting principles (GAAP) and, at all reasonable times, will be available and open to inspection and examination by any Partner.
Accounting records will be kept in accrual basis.
13. ANNUAL REPORT
After the end of each financial year during the Term of the Partnership, the Partners must ensure that the Partnership prepares an annual report (the “Annual Report”), which will include (i) balance sheet, (ii) cash flow, (iii) profit and loss statement, (iv) tax return filed for that financial year, (v) information necessary for each Partner to prepare income and other returns, and (vi) any additional information that one or more Partner may require. The Partnership must provide a copy of the Annual Report to each Partner.
14. PARTNERSHIP FINANCIAL YEAR
The financial year of the Partnership will end on 31st December each year.
Each Partner receive one vote carrying equal weight for any vote required by the Partnership.
The following Partner will serve as the Managing Partner: ___________________.
The Managing Partner will have control and management over day-to-day business of the Partnership for the purposes stated in this Agreement. All matters outside the scope of day-to-day business of the Partnership will be decided by a unanimous vote of all the Partners.
The Managing Partner is authorized to enter into contracts with firms or persons as may be required for the management of the business of the Partnership. The Managing Partner will not be liable to the remaining Partners for action or failure to act, resulting in harm or loss to the Partnership, except in the case of gross negligence or wilful misconduct.
The Managing Partner can withdraw from this position or can be replaced by a unanimous vote of all the remaining Partners. In such case, the remaining Partners will have equal rights in the management of the Partnership until and unless they appoint a successor Managing Partner.
The Partners may be compensated for services performed for the Partnership as from time to time agreed by unanimous vote of all the Partners.
18. ADMISSION OF NEW PARTNER
A new Partner may be admitted to the Partnership with a unanimous vote of all the Partners.
Any new Partner agrees to be bound by all the terms, conditions and covenants of this Agreement, including all current and future amendments and agrees to execute such documents as needed to effect the admission of the new Partner. Any business interest of the new Partner in the Partnership will be determined by a unanimous vote of all the Partners.
19. VOLUNTARILY WITHDRAWAL OF A PARTNER
By serving a notice of _____ days, any Partner can voluntarily withdraw from the Partnership at any time, which will result in dissolution of the Partnership.
20. INVOLUNTARY WITHDRAWAL OF A PARTNER
Involuntary withdrawal of a Partner (the “Dissociated Partner”) will result in dissolution of the Partnership and will include, but not limited to, following events: death of a Partner, physical disability or limited mental capacity of a Partner preventing him to reasonably participate in the Partnership, breach of fiduciary duty by or criminal conviction of a Partner, operation of law against a Partner or any act or omission of a Partner that can reasonably be expected to bring the business or societal reputation of the Partnership into disrepute.
A third party, who may acquire the interests of Dissociated Partner in the Partnership, will only acquire that Partner’s economic interests and rights and will not acquire any other rights of that Partner nor will be admitted as a new Partner in the Partnership or will have the rights to exercise any voting or management interests.
21. DISSOCIATION OF A PARTNER
Dissociation of a Partner for any reasons will result in dissolution of the Partnership. The Partnership will proceed to dissolution in a reasonable and timely manner, first paying all debts before distributing any of remaining funds and as per Valuation of Interest section below.
Except as provided in this Agreement, the Partnership can be dissolved as agreed by all the Partners. In the event of dissolution, each Partner will equally share any assets and liabilities of the Partnership (the “Dissolution Distribution”) and as per Valuation of Interest section below.
23. Valuation of Interest
Valuation of the Partnership will be determined by the fair market value appraisal of all assets of the Partnership in accordance of the generally accepted accounting principals (GAAP). This valuation would be conducted by an independent accounting firm as agreed by all the Partners and will be binding on all Partners. Valuation of interest of a each Partner will be based on that’s Partner’ share in the valuation of the Partnership less any outstanding liabilities that Partner may have to the Partnership.
Each Partner hereby acknowledges and agrees (i) that he will not engage in any business, whether directly or indirectly, that might compete with or that might be in conflict with the business of the Partnership, (ii) that he will fully disclose to all the Partners such competing business engagement, (iii) that a failure to comply to the terms of this clause will result in his involuntary withdrawal from the Partnership, and (iv) that he would indemnify other Partners in respect of any and all losses, expenses, damages and liabilities which may arise from a breach of any terms of this clause.
During the Term of this Agreement, the Partnership agrees to indemnify and hold harmless each Partner, arising out of a Partner’s participation in the business of the Partnership.
A Partner will not be entitled to indemnification arising out of his gross misconduct, wilful misconduct or breach of any provision of this Agreement.
A Partner will not be liable to the Partnership or to any other Partners for any error in judgement or for any act or omission done in good faith that is believed to be within the scope of authority conferred or implied by this Agreement.
27. GENERAL PROVISIONS
- DISPUTE RESOLUTION AND GOVERNING LAW
This Agreement shall be governed by and interpreted in accordance with the laws of the State of _________, without giving effect to its principles governing conflicts of law.
- ENTIRE AGREEMENT
This Agreement set forth the entire understanding of the parties with respect to the subject matter hereof and thereof. This Agreement supersedes all prior or simultaneous representations, discussions, negotiations, letters, proposals, agreements and understandings between the parties hereto with respect to the subject matter hereof, whether written or oral.
This Agreement may be amended, modified or supplemented only by a written instrument duly executed by an authorized representative of each of the parties.
Any provision of this Agreement that is determined to be invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability in such jurisdiction, without rendering invalid or unenforceable the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.
All notices provided for or permitted under this Agreement shall be deemed effective upon receipt, and shall be in writing and delivered to the Parties.
- Time is of essence in this Agreement.
- This Agreement may be executed in counterparts.
- This Agreement can be amended, in whole or in parts, only by unanimous written consent of all Partners.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.
Signed for and on behalf of ____________:
In the presence of:
Signed for and on behalf of ______________:
In the presence of:
Do you need help with drafting or reviewing Partnership Agreement?
Are you forming a partnership and want to bring all of your partners on the same page for their respective roles and responsibilities or to address unfortunate situations such as protecting the partnership if a partner leaves?
We can help you draft or review your Partnership Agreement to save you time and money, while ensuring the success of your partnership business for the the long term.
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