What Is a Partnership Agreement?
A partnership agreement is a business agreement between two parties who agree on becoming partners for a company. The contract includes various roles and conditions for the two partners, the powers they have, their contribution in the business, and nature of business. The contract also contains rules and strategies associated with the operation of the company. The agreement makes sure that the two companies effectively share responsibilities, profits, losses, capital, etc. The types of the partnership agreement are general partnership contract, limited partnership, and limited liability partnership. According to the agreement, each partner is responsible for any debts of the business. The capital investment and profit shares are also clearly stated in the agreement. In case one partner decides to withdraw from the contract, he is still responsible for the investments and debts of the business. Various businesses examples are textiles, IT, advertisement, etc
When Do You Need a Partnership Agreement?
When any organizations or individuals decide to become partners in a company or business, this agreement is needed. The purpose of this agreement is to make sure both parties agree on the same terms and responsibilities and shows the intentions for becoming partners. The agreement also makes sure that if one of the partners backs out of business, he is still liable for the expenses already incurred by the company. In that case, a partnership dissolution agreement comes into play. The partner also needs to submit a proper notice for leaving the partnership.
Key Terms of Partnership Agreement Include:
- Names and details of both the partners.
- Name of the company
- Purpose of the business
- Address of the company
- Distribution of profits and loses
- Contributions or investments of both the partners
Inclusions in the Partnership Agreement
The two parties who sign the agreement are two individuals or two organizations who want to become partners and share a business. The two parties sign the agreement letter.
The effective date of the agreement is the date from which the agreement is valid.
Where Does it Apply
The agreement applies in the following cases:
- When two parties agree to be partners for a company.
- When two companies collaborate, and the two owners become partners.
How to Draft a Partnership Agreement
Drafting an agreement Includes the Following Steps:
- First, the two parties decide on becoming partners. Both parties also discuss the terms of the agreement, including investments, profits, and losses, effective date, etc.
- After deciding on various responsibilities, approach a legal team, and ask them to draft a partnership agreement mentioning all the details of the terms.
- Both parties cross check the details mentioned in the negotiation and file the contract in the local court.
- The small business partnership contract works in the same way.
Benefits of a Partnership Agreement
The partnership agreement is very beneficial for both parties. The various benefits of the agreement are listed below:
Pros of Partnership Agreement
- This agreement spells out all the details of the investment and profits and losses, which helps at the time of disputes.
- The agreement is a legal proof of the partnership between two parties.
- The draft is also helpful for one partner if the other decides to end the partnership as he still has to pay remaining debts.
Cons of Not Having a Partnership Agreement
- In the absence of the partnership agreement, the default rules of the state are applied. Like, if one person passes away or leaves, the state laws dissolve your partnership automatically.
- The business might also suffer an unexpected tax liability if there is no agreement.
- This business partnership contract also makes sure the investment and profits are clear among the two parties to avoid any conflict.
Key Terms/Clauses in Partnership Agreement
The different key terms and clauses included in the partnership agreement are:
- Contribution of capital: Percentage of ownership is decided based on the investment.
- Distribution of profit and loss: The distribution is done based on either a fixed percentage or equal shares.
- Notices: The notices issued by either of the parties are mentioned under this clause.
- Obligations: The parties need to fulfill some requirements whose details are mentioned under this clause.
- Disclaimer: This clause contains the particulars of disclaimers and consequences stated by both parties.
- Remedies: This clause specifies the solutions that come into action in case of default of the partnership agreement.
Sample Partnership Agreement
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