Partnerships offer a number of different benefits to members who wish to do business together. But before you launch a partnership, it is imperative that a written agreement be established. A well-drafted partnership agreement will accomplish several important objectives such as ensuring every member understands his or her obligations to the company.
One of the first steps in writing a partnership agreement is deciding what sort of partnership you wish to form. In Massachusetts, you can select from among the following:
- General partnership (GP)
- Limited partnership (LP)
- Limited liability partnership (LLP)
There are differences among these in terms of the liabilities, benefits, and powers of the individual members. An attorney can discuss more with you about the best structure for your partnership.
Once a name is settled on (which will reflect the type of partnership chosen), it’s time to draft a partnership agreement. This governing document, while not required to form a partnership, is essential to protecting the rights and interests of all partners and ensuring the success of the business. Every partnership is different, so the exact terms of your agreement will depend on your company’s specific needs.
When you set out to create a business partnership agreement, be certain that you cover (at least) the following:
- What each partner is contributing to the partnership. This can be expressed in terms of the specific resources contributed by each partner (e.g. capital, equipment, or credit) as well as the percentage of ownership each member will enjoy. In other words, it is common for the ownership interests of each member to reflect what he or she contributed to the partnership.
- How profits and losses will be shared. The division of profits and losses in a partnership is one of the most important terms and should be clearly expressed. Vague or ambiguous language could lead to conflicts, so make sure to pay special attention to this part of the agreement.
- Authority and management duties of each partner. What rights will each partner have? What authority and power over the partnership will each be granted? What are the specific duties of each partner? The more detail you include here, the better.
- Duration of the partnership. Sometimes, partnerships are established to accomplish specific business goals. Afterwards, the partners may wish to go their separate ways and dissolve the partnership. But the business may be formed for an indefinite period of time. The agreement can be drafted to reflect how long the partnership is intended to exist.
- How decisions will be made. What does the daily business operation of the partnership look like? More specifically, how will partnership decisions be made? Adding terms that explain the decision-making process is important to avoid misunderstandings and needless conflicts between partners.
- Dispute resolution procedures. Even the best partnerships can experience turmoil when partners disagree. However, the absence of a dispute resolution procedure could be disastrous for the partnership. In the event of a protracted disagreement, the partners may wish to use (for instance) alternative dispute resolution methods such as mediation to settle the matter.
- How to handle the death or withdrawal of a partner. Finally, the partnership agreement should clarify what happens if a partner dies or decides to leave the company. For example, will the remaining partners be able to buy out the deceased or departing member’s interest in the company? And how will that interest be valued?
Having an effective and comprehensive partnership agreement in place gives peace of mind to all partners and allows them to focus on making the business successful.