Business Partnership Agreements: A Guide

Business partnership agreements are incredibly valuable legal documents to create when starting a business with one or more partners. This written agreement defines the business relationship and the partners’ roles and responsibilities.

Here, we will discuss fundamental details about business partnership agreements, including why they’re necessary, what they should include, and the importance of working with an experienced Denver business lawyer to draft yours.

Why a Partnership Agreement is Necessary

Without a partnership agreement, a partnership is subject to the default state laws that govern it. These laws might not meet your expectations, resulting in undesirable consequences, such as an unwanted business dissolution if a partner leaves.

A business partnership agreement provides a customized structure that supports the partners’ unique goals and purposes, making conflicts and misunderstandings less likely.

Covering all the vital legal considerations and potential risks business partners face in a carefully constructed business partnership agreement can avoid difficulties that could make a business relationship uncomfortable or unworkable.

These considerations and risks include:

Rights and responsibilities of each partner
Funding requirements
Dispute resolution procedures

Don’t miss this article next: Merger and Acquisition Process: 7 Steps for Success.

Essential Components of a Partnership Agreement

Certain components serve as the foundation of your partnership and cover all its aspects and each partner’s rights and obligations.

These include:

Ownership Interests

A key element in a partnership agreement is ownership interest, which defines each partner’s ownership percentage.

It determines who owns what and how much, and it also dictates how much of the profits and losses a partner will receive and their level of control.

Having clear ownership interests reduces conflicts over control and profit-sharing later on.

Decision-Making Processes

The agreement should mandate how decisions are made, such as the amount of votes a partner has and whether their votes are weighted in significance. Will the business require a simple majority for a decision, or will each decision be unanimous?

Capital Contributions and Financial Obligations

Partners may contribute different amounts of capital to a startup. The agreement should address the amount each partner brought to the company as capital and where they stand financially going forward.

This means addressing responsibilities for additional funding if the business needs more so all partners are clear on their financial obligations.

Profit Distribution and Withdrawals

The partnership agreement should specify the ratio of profits that partners will share, which may or may not mirror the ownership split.

The agreement should also specify when partners may withdraw their share of the profits to avoid misunderstandings about managing cash flow.

Addressing Death or Disability

An untimely death or disability of a partner can create problems for the business. A well-drawn partnership agreement will provide for what happens to a partner’s interest upon death or disability.

This could include buyout rights for the surviving partners or provisions for transferring the partnership interest to a successor.

Procedures for Partner Withdrawal or Addition

As the business becomes more established and the dynamics change, the partnership may need to change, too.

For this reason, the agreement should include a well-defined process for withdrawing a partner or adding a new partner.

In doing so, the business ensures operations continuity and protects the remaining partners’ interests.

Advantages of a Partnership

A business partnership provides many advantages, which makes it a go-to option for many entrepreneurs.

From its ease of formation to tax benefits, a partnership can be a flexible and collaborative way to run a business.

1. Ease of Establishment

Partnerships are easy to set up because they require very little paperwork and legal formalities, and small business owners can spend more time building the business and less time on administration.

2. Tax Benefits

Another major advantage of a partnership is that, unlike a corporation, it isn’t taxed at the business level.

Instead, profits and losses funnel through to the partners, who report them on their personal returns. This can result in significant tax savings and a more manageable tax return.

3. Shared Responsibilities and Diverse Skill Sets

Responsibilities and work are shared in this relationship.

This reduces the burden on any individual and allows the business to benefit from the partners’ different skills to make decisions and run the business more effectively.

4. Structuring a 50/50 Partnership

A 50/50 partnership must give each partner an equal say in the business to avoid disagreements.

This includes the partnership structure. Establishing this makes it easier for both partners to manage the business effectively over time.

Read this article next to find out what to do if your business partner sues you.

5. Agreement on Details

Before executing the partnership agreement, the partners must discuss what they want out of the business and how much they plan to commit to it and each other.

This conversation sets the stage for the written agreement and ensures it is congruent with their mutual intentions.

Legal Help with Partnership Agreements

The power of a well-written partnership agreement is immense, and working with an experienced Denver business lawyer ensures your agreement is comprehensive and legally sound.

Contact Contiguglia Law in Denver to speak with a business lawyer about your business formation needs.

Partnership Agreements: FAQs

Do I need a partnership agreement?

Although it isn’t a legally required document, it is a critically important part of a well-functioning business partnership.

Such an agreement is a significant advantage, especially when it prevents disputes by spelling out each partner’s expectations of the other in an enforceable legal document.

Are there different types of partnerships?

Yes, there are several different business structures in which you can establish your partnership—general, limited liability, limited, etc.

Each type of business formation has legal implications, and your partnership agreement should reflect this information.

Can you break a partnership agreement?

Yes, but the implications of doing so will vary depending on the terms of the agreement and what they say about ending or breaking a partnership agreement.

If the partnership agreement contains a dissolution clause, those steps become the path to follow to protect yourself from legal consequences.