What is a General Partnership Agreement?
Introduction
Over the years, conflicts have led to the dissolution of several jointly owned businesses because there were no clear cut guides on their operations. The need for a legal document that would give direction to businesses became a priority and this necessitated the need for a partnership agreement. While this article will dwell mainly on the General Partnership Agreement, it is pertinent to explore what the concept of a partnership agreement entails in itself.
What is a Partnership Agreement?
A partnership agreement is a written agreement signed between two or more individuals who intend to form and manage a business, with the aim of making profits. This document of agreement is also known as the Partnership Contract. It is integral to the setting up of a jointly-owned business. This legal contract caters and protects the interests of the individuals involved as it clearly highlights the nature of the business, the financial implications as well as the rights and roles of those involved. It basically codifies all the terms and conditions of the partners’ mode of operations.
Types of Partnership Agreement
This is highly dependent on state laws because partnerships are formed by states. Types of partnership agreement include but not limited to:
1. General Partnership
2. Limited Partnerships
3. Limited Liability Partnerships
4. Joint Ventures as Partnerships
5. Qualified Joint Ventures as Partnerships
However, this article would solely focus on the General Partnership Agreement.
What is a General Partnership Agreement?
First, a General Partnership involves partners that are duly involved in the daily affairs of the partnership. They are usually called General Partners and one major responsibility of these partners is that they are all personally responsible for the overall liabilities of the partnership. Again, a General Partnership Agreement is the legal agreement between general partners that spells out the details of the partnership, capital shares as well as the procedures for the sales of partnership stakes and exit from the partnership.
The General Partnership Agreement is highly needed as several businesses have crashed as a result of lack of cohesion in the administration. With a legal document guiding the operations of general partners, it becomes easier to evaluate the activities of individual partners and this would also assist in the decision making processes of the partnership as all partners are liable for the actions of all those involved in the partnership.
Benefits of General Partnership
Tax Benefits
Since individuals form General Partnership, they are taxed the same way as sole proprietorship. Individual partners are expected to include their business income on their personal tax returns. Under the U.S. law, partners are not liable for withholding tax payments from one another.
Diversity Benefits
General Partnership allows for multiplicity of individuals to be involved in piloting the affairs of a business. It gives room for diversified ideas that could help scale up the business. The experiences and skills of general partners would be beneficial to the growth of the business,
Structural Benefits
The structure of a general partnership could easily be converted to that of a limited liability company (LLC) if liabilities become a concern to general partners. For instance, a general partners is only responsible for at most, half of the liabilities incurred by the partnership, although, it could be lesser in cases where there are more than two general partners. The risk that comes with the lack of protection for personal assets could be reduced when general partnerships eventually metamorphose into a LLC.
Formation Benefits
The processes of forming general partnership require less paperwork. It is very possible for them to operate in different states without seeking a new permit for each state. And more so, there are less stringent regulations that guide their mode of operations.
Fundraising Benefits
The multiplicity of general partners allows that many partners to get involved in fundraising activities for the business. With more people on board, the chances of fundraising success increase and this is beneficial to the partnership.
Disadvantages of General Partnership
Disputes
It is normal for conflict to arise among general partners in the course of their operations. However, it becomes inhibiting when these conflicts are not resolved amicably. The bad blood between those involved could actually affect the growth of the business. Irreconcilable differences might lead to exit of partners to avoid any further problem.
Abrupt Termination of Partnership
The general partnership agreement always emphasizes the need for all general partners to be fully involved and available for the business to thrive. If in the occasion a partner decides to quit or dies prematurely, the business will be terminated if the partnership agreement is not in place. This implies that assets would have to be shared to the general partners involved and there would be a need for the business to restart if need be.
Unlimited Liabilities
The losses from general partnership cannot be separated. When a creditor makes a claim, there is unlimited access to the assets of each general partner. And most times, the negative credit fallout option could last within the range of 7-10 years. The implication is that many of the general partners are forced into bankruptcy.
Partnership Agreement Information
While there might be slight differences in information contained in a partnership agreement based on the business objectives of the partners involved, there are still some fundamental terms that must be well detailed in the partnership agreement and they are explained below:
Basic Partnership Information
Details on the partnership name would have to be codified. Also, the date which the partnership agreement is meant to take effect would have to be documented also. Other basic information includes the purpose as well as the primary address of the business.
Partners’ Capital Contributions
This contribution could be in form of money, property or services and every partner is expected to contribute their own designated quota. In cases where the contribution is in form of cash, the partnership agreement would state clearly what each partner should contribute. Also, if the contribution is in form of property or services, it is divided equally among partners and the value in cash would also be stated.
Profit and Loss Distribution
The partnership agreement would also contain how profits and losses are to be shared among partners. The sharing formula for this distribution could be based on an equal or percentage basis. The agreement would also state clearly when profits can be deducted from the business.
Duration of Partnership
In some cases, the length of partnership is clearly specified. The partnership agreement will contain the period or year the business would be dissolved or ended.
Conflict Resolution
Partnership agreement must contain arbitration processes that would be used in mediation during conflict resolutions. These processes are to be reviewed periodically to ensure that the wishes of the partners are well catered for.
Free Partnership Agreement Template
It is rather safe to use an Attorney when preparing your partnership agreement. The draft below is just a sample of a partnership agreement template and by no means a legal document.
PARTNERSHIP AGREEMENT
THIS PARTNERSHIP AGREEMENT (the “Agreement”) made and effective this _________ day of __________, _________ (the “Execution Date”), between the following individuals, referred to in this Agreement as the “Partner” individually and “Partners” collectively.
___________________________________
___________________________________
___________________________________
___________________________________
Partners’ Names
Background
The Partners wish to set forth, the terms and conditions by which they will associate themselves in the Partnership in a written agreement.
NOW, THEREFORE, in consideration of the Partners and the promises contained in this Agreement, the Partners affirm in writing their association as a partnership in accordance with the following provisions:
1. Name and Place of Business
The name of the partnership shall be called __________ (the “Partnership”).
2. Purpose
The purpose of the Partnership shall be to ____________
3. Term
The Partnership shall begin as of the date of this Agreement and shall continue until terminated as provided in this Agreement.
4. Capital Accounts
A. The Partners shall make an initial investment of capital, in cash or property contemporaneously with the execution of this Agreement, as follows:
| Partner’s Name | Description of Contribution | Quoted Value |
| $ (Amount) USD | ||
5. Profits and Losses
Until modified by mutual consent of all the Partners, the profits and losses of the Partnership and all items of income, gain, loss, deduction, or credit shall be shared by the Partners in the following proportions:
| Partner’s Name | Partner’s Share (Loss/Profits) |
6. Books and Records of Account
The Partnership books of accounts shall be maintained at the principal office of the Partnership and each Partner shall be granted access to the books and records at all reasonable times for inspection and examination.
7. Future Projects
The Partners recognize that future projects for the Partnership depend upon many factors beyond current circumstances, but the Partners wish to set forth in writing that the relationship among the Partners will continue to flourish in future projects on similar terms and conditions as set forth in this Agreement, but there shall be no legal obligations among the Partners to so continue such relationship in connection with future projects.
8. Financial Decisions
Decisions on the distribution of profits and allocation of losses shall be decided by unanimous agreement of the Partners,
9. Duty of Loyalty and Accountability
None of the Partners shall sell, assign, transfer, mortgage, encumber, or otherwise dispose of the whole or part of that Partner’s interest in the Partnership, and no purchaser or other transferee shall have any rights in the Partnership as an assignee or otherwise with respect to all or any part of that Partnership interest attempted to be sold, assigned, transferred, mortgaged, encumbered, or otherwise disposed of, unless and to the extent that the remaining Partner(s) have given consent to such sale, assignment, transfer, mortgage, or encumbrance,
10. Death or Withdrawal
The death or withdrawal of any of the Partners or of any successor in interest to any Partner shall lead to the dissolution of the Partnership.
11. Dissolution of Partnership
In the case of dissolution, the Partnership shall be dissolved only by a unanimous consent of the Partners. Upon dissolution, Partners will share equally the ‘dissolution distribution’ of any assets and liabilities of the Partnership.
12. Title to Partnership Property
This shall remain in the name of the Partnership and all beneficial interests shall accrue to the Partners in the percentages set forth in this Agreement.
13. Leases
All leases of Partnership assets shall be in writing and on forms approved by all the Partners.
14. Governing Law
This Agreement and the rights of the Partners will be construed in accordance with and shall be governed by the laws of the State of _____State______.
15. Notices
Any written notice required by this Agreement shall be sufficient if sent to the Partner or other party to be served by registered or certified mail, return receipt requested, addressed to the Partner or other party at the last known home or office address, in which event the date of the notice shall be the date of deposit in the United States mails, postage prepaid.
16. Amendment
This Agreement contains the entire agreement of the Partners with respect to the Partnership and may be amended in part or in whole, only by the written agreement executed and delivered by all of the Partners.
17. Binding Upon Heirs
This Agreement shall bind each of the Partners and upon their respective heirs, executors, administrators, devisees, legatees, successors and assigns.
IN WITNESS WHEREOF, the Partners have duly affixed their signatures under hand and seal on this __________ day of ___________.
________________________________ ____________________________
WITNESS: _______________________ ______________________ (Partner 1)
________________________________ ____________________________
WITNESS: _______________________ _____________________ (Partner 2)
________________________________ ____________________________
Conclusion
Depending on business objectives, it is evident that the General Partnership Agreement remains the soul of a jointly owned business as it provides a framework that every other structure of the business is hinged on. It therefore becomes necessary for all potential and existing partners maintain a general partnership agreement for effective business productivity.
