Free Partnership Agreement

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Free Free Partnership Agreement

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Partnership Agreement

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PARTNERSHIP AGREEMENT

THIS PARTNERSHIP AGREEMENT (the "Agreement") made and entered into this ________ day of ________________, ________ (the "Execution Date"),

BETWEEN:

____________________________ of ___________________________________________________________________, and
____________________________ of ___________________________________________________________________
(individually the "Partner" and collectively the "Partners").

BACKGROUND:

  1. The Partners wish to associate themselves as partners in business.
  2. This Agreement sets out the terms and conditions that govern the Partners within the Partnership.

IN CONSIDERATION OF and as a condition of the Partners entering into this Agreement and other valuable consideration, the receipt and sufficiency of which consideration is acknowledged, the parties to this Agreement agree as follows:

  1. Formation
  2. By this Agreement the Partners enter into a general partnership (the "Partnership") in accordance with the laws of The Commonwealth of Virginia. The rights and obligations of the Partners will be as stated in the applicable legislation of The Commonwealth of Virginia (the 'Act') except as otherwise provided in this Agreement.
  3. Name
  4. The firm name of the Partnership will be: _____________________
  5. Purpose
  6. The purpose of the Partnership will be: ___________________________________
  7. Term
  8. The Partnership will begin on July 1st, 2022 and will continue until terminated as provided in this Agreement.
  9. Place of Business
  10. The principal office of the business of the Partnership will be located at ____________________________________________________________ or such other place as the Partners may from time to time designate.
  11. Initial Capital Contributions
  12. Each of the Partners has contributed or will contribute to the capital of the Partnership, in cash or property or in non-monetary contributions in agreed upon value, as follows (the “Initial Capital Contribution"):

    Partner

    Contribution Description

    Agreed Value

    ____________________________

       

    ____________________________

       


  13. All Partners must contribute their respective Initial Capital Contributions fully by July 1, 2022.
  14. Additional Capital
  15. The capital contribution of a Partner comprises that Partner’s Initial Capital Contribution and any additional capital contribution (the “Additional Capital Contribution”) made by that Partner to the Partnership at a later date (together the “Capital Contribution”). No Partner will be required to make an Additional Capital Contribution. When the Partnership requires additional capital, each Partner will have the opportunity to make an Additional Capital Contribution in proportion to that Partner’s share of the total Capital Contributions to the Partnership. If an individual Partner is unwilling or unable to meet the additional contribution requirement within a reasonable period, as required by Partnership business obligations, then by a unanimous vote of the Partners the remaining Partner may contribute in proportion to their existing Capital Contributions to resolve the amount in default.
  16. Any advance of money to the Partnership by any Partner in excess of the amounts provided for in this Agreement or subsequently agreed to as Additional Capital Contribution will be deemed a debt owed by the Partnership and not an increase in Capital Contribution of the Partner. This liability will be repaid with interest at rates and times to be determined by a majority of the Partners within the limits of what is required or permitted in the Act. This liability will not entitle the lending Partner to any increased share of the Partnership's profits nor to a greater voting power. Such debts may have preference or priority over any other payments to Partners as may be determined by a majority of the Partners.
  17. Withdrawal of Capital
  18. No Partner will withdraw any portion of their Capital Contribution without the express written consent of the remaining Partners.
  19. Capital Accounts
  20. An individual capital account (the "Capital Accounts") will be maintained for each Partner and their Initial Capital Contribution will be credited to this account. Any Additional Capital Contributions made by any Partner will be credited to that Partner's individual Capital Account.
  21. Interest on Capital
  22. No borrowing charge or loan interest will be due or payable to any Partner on their agreed Capital Contribution inclusive of any agreed Additional Capital Contributions.
  23. Financial Decisions
  24. Decisions regarding the distribution of profits, allocation of losses, and the requirement for Additional Capital Contributions as well as all other financial matters will be decided by a unanimous vote of the Partners.
  25. Profit and Loss
  26. Subject to any other provisions of this Agreement, the net profits and losses of the Partnership, for both accounting and tax purposes, will accrue to and be borne by the Partners in equal proportions, unless an Additional Capital Contribution has been made which changed the Initial Capital Contribution proportions of the Partners in which case each Partner will share in the net profit and losses of the Partnership in proportion to the new Capital Contributions (the "Profit and Loss Distribution").
  27. Books of Account
  28. 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. The books and records of the Partnership will reflect all the Partnership’s transactions and will be appropriate and adequate for the business conducted by the Partnership.
  29. Annual Report
  30. As soon as practicable after the close of each fiscal year, the Partnership will furnish to each Partner an annual report showing a full and complete account of the condition of the Partnership. This report will consist of at least the following documents:
    1. a statement of all information as will be necessary for the preparation of each Partner's income or other tax returns;
    2. a copy of the Partnership's federal income tax returns for that fiscal year; and
    3. any additional information that the Partners may require.
  31. Banking and Partnership Funds
  32. The funds of the Partnership will be placed in such investments and banking accounts as will be designated by the Partners. Partnership funds will be held in the name of the Partnership and will not be commingled with those of any other person or entity.
  33. Fiscal Year
  34. The fiscal year will end on January 1 of each year.
  35. Audit
  36. Any of the Partners will have the right to request an audit of the Partnership books. The cost of the audit will be borne by the Partnership. The audit will be performed by an accounting firm acceptable to all the Partners. Not more than one (1) audit will be required by any or all of the Partners for any fiscal year.
  37. Management
  38. All the Partners will be consulted and the advice and opinions of the Partners will be obtained as much as is practicable. However, the Managing Partner will have management and control of the day-to-day business of the Partnership for the purposes stated in this Agreement. All matters outside the day-to-day business of the Partnership will be decided by a unanimous vote of the Partners.
  39. ___________________ will be the Managing Partner. The term "Managing Partner" will also include any party subsequently appointed to that role.
  40. In addition to day-to-day management tasks, the Managing Partner's duties will include keeping, or causing to be kept, full and accurate business records for the Partnership according to generally accepted accounting principles (GAAP) and overseeing the preparation of any reports considered reasonably necessary to keep the Partners informed of the business performance of the Partnership.
  41. A Managing Partner can voluntarily withdraw from the position of Managing Partner or can be replaced by a unanimous vote of the remaining Partners. In the event of a withdrawal or removal of the Managing Partner from the position of Managing Partner or from the Partnership, the remaining Partners will have equal rights in the management of the Partnership until they appoint a successor Managing Partner.
  42. The Managing Partner will not be liable to the remaining Partners for any action or failure to act resulting in loss or harm to the Partnership except in the case of gross negligence or willful misconduct.
  43. Contract Binding Authority
  44. Each Partner will have authority to bind the Partnership in contract.
  45. Tax Elections
  46. The Partnership will elect out of the application of Chapter 63 Subchapter C of the Internal Revenue Code of 1986, in each taxable year in which it is eligible to do so in accordance with Section 6221(b), by making that election in a timely filed return for such taxable year disclosing the name and taxpayer identification number of each Partner.
  47. Meetings
  48. Regular meetings of the Partners will be held as required.
  49. Any Partner can call a special meeting to resolve issues that require a vote, as indicated by this Agreement, by providing all Partners with reasonable notice. In the case of a special vote, the meeting will be restricted to the specific purpose for which the meeting was held.
  50. All meetings will be held at a time and in a location that is reasonable, convenient and practical considering the situation of all Partners.
  51. Admitting a New Partner
  52. No new Partners may be admitted into the Partnership.
  53. Voluntary Withdrawal of a Partner
  54. Any Partner will have the right to voluntarily withdraw from the Partnership at any time. Written notice of intention to withdraw must be served upon the remaining Partners at least three (3) months prior to the withdrawal date.
  55. The voluntary withdrawal of a Partner will result in the dissolution of the Partnership.
  56. A Dissociated Partner will only exercise the right to withdraw in good faith and will act to minimize any present or future harm done to the remaining Partners as a result of the withdrawal.
  57. Involuntary Withdrawal of a Partner
  58. Events resulting in the involuntary withdrawal of a Partner from the Partnership will include but not be limited to: death of a Partner; Partner mental incapacity; Partner disability preventing reasonable participation in the Partnership; Partner incompetence; breach of fiduciary duties by a Partner; criminal conviction of a Partner; Expulsion 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.
  59. The involuntary withdrawal of a Partner will result in the dissolution of the Partnership.
  60. A trustee in bankruptcy or similar third party who may acquire that Dissociated Partner's interest in the Partnership will only acquire that Partner's economic rights and interests and will not acquire any other rights of that Partner or be admitted as a Partner of the Partnership or have the right to exercise any management or voting interests.
  61. Dissociation of a Partner
  62. Where the dissociation of a Partner for any reason results in the dissolution of the Partnership then the Partnership will proceed in a reasonable and timely manner to dissolve the Partnership, with all debts being paid first, prior to any distribution of the remaining funds. Valuation and distribution will be determined as described in the Valuation of Interest section of this Agreement.
  63. The remaining Partners retain the right to seek damages from a Dissociated Partner where the dissociation resulted from a malicious or criminal act by the Dissociated Partner or where the Dissociated Partner had breached their fiduciary duty to the Partnership or was in breach of this Agreement or had acted in a way that could reasonably be foreseen to bring harm or damage to the Partnership or to the reputation of the Partnership.
  64. Dissolution
  65. Except as otherwise provided in this Agreement, the Partnership may be dissolved only with the unanimous consent of all Partners.
  66. Distribution of Property on Dissolution of Partnership
  67. In the event of the dissolution of the Partnership, each Partner will share equally in any remaining assets or liabilities of the Partnership, unless an Additional Capital Contribution has been made which changed the Initial Capital Contribution proportions of the Partners in which case the Partners will share the assets or liabilities in proportion to their respective Capital Contributions (the “Dissolution Distribution”).
  68. Upon Dissolution of the Partnership and liquidation of Partnership Property, and after payment of all selling costs and expenses, the liquidator will distribute the Partnership assets to the following groups according to the following order of priority:
    1. in satisfaction of liabilities to creditors except Partnership obligations to current Partners;
    2. in satisfaction of Partnership debt obligations to current Partners; and then
    3. to the Partners according to the Dissolution Distribution described above.
  69. The claims of each priority group will be satisfied in full before satisfying any claims of a lower priority group. Any excess of Partnership assets after liabilities or any insufficiency in Partnership assets in resolving liabilities under this section will be shared by the Partners according to the Dissolution Distribution described above.
  70. Valuation of Interest
  71. In the absence of a written agreement setting a value, the value of the Partnership will be based on the fair market value appraisal of all Partnership assets (less liabilities) determined in accordance with generally accepted accounting principles (GAAP). This appraisal will be conducted by an independent accounting firm agreed to by all Partners. An appraiser will be appointed within a reasonable period of the date of withdrawal or dissolution. The results of the appraisal will be binding on all Partners. A withdrawing Partner's interest will be based on that Partner's proportion of the Dissolution Distribution described above, less any outstanding liabilities the withdrawing Partner may have to the Partnership. The intent of this section is to ensure the survival of the Partnership despite the withdrawal of any individual Partner.
  72. No allowance will be made for goodwill, trade name, patents or other intangible assets, except where those assets have been reflected on the Partnership books immediately prior to valuation.
  73. Goodwill
  74. The goodwill of the Partnership business will be assessed at an amount to be determined by appraisal using generally accepted accounting principles (GAAP).
  75. Title to Partnership Property
  76. Title to all Partnership Property will remain in the name of the Partnership. No Partner or group of Partners will have any ownership interest in such Partnership Property in whole or in part.
  77. Voting
  78. Any vote required by the Partnership will be assessed where each Partner receives one vote carrying equal weight, unless an Additional Capital Contribution has been made which changed the Initial Capital Contribution proportions of the Partners in which case each Partner will have voting strength in proportion to Capital Contributions.
  79. Force Majeure
  80. A Partner will be free of liability to the Partnership where the Partner is prevented from executing their obligations under this Agreement in whole or in part due to force majeure, such as earthquake, typhoon, flood, fire, and war or any other unforeseen and uncontrollable event where the Partner has communicated the circumstance of said event to any and all other Partners and taken any and all appropriate action to mitigate said event.
  81. Duty of Loyalty
  82. No Partner will engage in any business, venture or transaction, whether directly or indirectly, that might be competitive with the business of the Partnership or that would be in direct conflict of interest to the Partnership without the unanimous written consent of the remaining Partners. Any and all businesses, ventures or transactions with any appearance of conflict of interest must be fully disclosed to all other Partners. Failure to comply with any of the terms of this clause will be deemed an Involuntary Withdrawal of the offending Partner and may be treated accordingly by the remaining Partners.
  83. Duty of Accountability for Private Profits
  84. Each Partner must account to the Partnership for any benefit derived by that Partner without the consent of the other Partners from any transaction concerning the Partnership or any use by that Partner of the Partnership property, name or business connection. This duty continues to apply to any transactions undertaken after the Partnership has been dissolved but before the affairs of the Partnership have been completely wound up by the surviving Partner or Partners or their agent or agents.
  85. Duty to Devote Time
  86. Each Partner will devote such time and attention to the business of the Partnership as the majority of the Partners will from time to time reasonably determine for the conduct of the Partnership business.
  87. Forbidden Acts
  88. No Partner may do any act in contravention of this Agreement.
  89. No Partner may permit, intentionally or unintentionally, the assignment of express, implied or apparent authority to a third party that is not a Partner in the Partnership.
  90. No Partner may do any act that would make it impossible to carry on the ordinary business of the Partnership.
  91. No Partner may confess a judgment against the Partnership.
  92. No Partner will have the right or authority to bind or obligate the Partnership to any extent with regard to any matter outside the intended purpose of the Partnership.
  93. Any violation of the above Forbidden Acts will be deemed an Involuntary Withdrawal of the offending Partner and may be treated accordingly by the remaining Partners.
  94. Indemnification
  95. All Partners will be indemnified and held harmless by the Partnership from and against any and all claims of any nature, whatsoever, arising out of a Partner's participation in Partnership affairs. A Partner will not be entitled to indemnification under this section for liability arising out of gross negligence or willful misconduct of the Partner or the breach by the Partner of any provisions of this Agreement.
  96. Liability
  97. A Partner will not be liable to the Partnership, or to any other Partner, for any mistake or error in judgment or for any act or omission done in good faith and believed to be within the scope of authority conferred or implied by this Agreement or the Partnership.
  98. Liability Insurance
  99. The Partnership may acquire insurance on behalf of any Partner, employee, agent or other person engaged in the business interest of the Partnership against any liability asserted against them or incurred by them while acting in good faith on behalf of the Partnership.
  100. Life Insurance
  101. The Partnership will have the right to acquire life insurance on the lives of any or all of the Partners, whenever it is deemed necessary by the Partnership. Each Partner will cooperate fully with the Partnership in obtaining any such policies of life insurance.
  102. Amendments
  103. This Agreement may not be amended in whole or in part without the unanimous written consent of all Partners.
  104. Governing Law and Jurisdiction
  105. This Agreement will be construed in accordance with and exclusively governed by the laws of The Commonwealth of Virginia.
  106. The Partners submit to the jurisdiction of the courts of The Commonwealth of Virginia for the enforcement of this Agreement or any arbitration award or decision arising from this Agreement.
  107. Definitions
  108. For the purpose of this Agreement, the following terms are defined as follows:
    1. "Additional Capital Contributions" means Capital Contributions, other than Initial Capital Contributions, made by Partners to the Partnership.
    2. "Capital Contribution" means the total amount of cash or Property contributed to the Partnership by any one Partner.
    3. "Dissociated Partner" means any Partner who is removed from the Partnership through a voluntary or involuntary withdrawal as provided in this Agreement.
    4. "Expulsion of a Partner" can occur on application by the Partnership or another Partner, where it has been determined that the Partner:
      1. has engaged in wrongful conduct that adversely and materially affected the Partnership's business;
      2. has willfully or persistently committed a material breach of this Agreement or of a duty owed to the Partnership or to the other Partners; or
      3. has engaged in conduct relating to the Partnership's business that makes it not reasonably practicable to carry on the business with the Partner.
    5. "Initial Capital Contribution" means Capital Contributions made by any Partner to acquire an interest in the Partnership.
    6. "Operation of Law" means rights or duties that are cast upon a party by the law, without any act or agreement on the part of the individual including, but not limited to, an assignment for the benefit of creditors, a divorce, or a bankruptcy.
  109. Miscellaneous
  110. Time is of the essence in this Agreement.
  111. This Agreement may be executed in counterpart.
  112. Headings are inserted for the convenience of the parties only and are not to be considered when interpreting this Agreement. Words in the singular mean and include the plural and vice versa. Words in the masculine gender include the feminine gender and vice versa. Words in the neuter gender include the masculine gender and the feminine gender and vice versa.
  113. If any term, covenant, condition or provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, it is the parties' intent that such provision be reduced in scope by the court only to the extent deemed necessary by that court to render the provision reasonable and enforceable and the remainder of the provisions of this Agreement will in no way be affected, impaired or invalidated as a result.
  114. This Agreement contains the entire agreement between the parties. All negotiations and understandings have been included in this Agreement. Statements or representations which may have been made by any party to this Agreement in the negotiation stages of this Agreement may in some way be inconsistent with this final written Agreement. All such statements are declared to be of no value in this Agreement. Only the written terms of this Agreement will bind the parties.
  115. This Agreement and the terms and conditions contained in this Agreement apply to and are binding upon the Partner's successors, assigns, executors, administrators, beneficiaries, and representatives.
  116. Any notices or delivery required here will be deemed completed when hand-delivered, delivered by agent, or seven (7) days after being placed in the post, postage prepaid, to the parties at the addresses contained in this Agreement or as the parties may later designate in writing.
  117. All of the rights, remedies and benefits provided by this Agreement will be cumulative and will not be exclusive of any other such rights, remedies and benefits allowed by law.

IN WITNESS WHEREOF the Partners have duly affixed their signatures under hand and seal on this ________ day of ________________, ________.

_______________________________
WITNESS:  ______________________

_______________________________
______________________(Partner)

_______________________________
WITNESS:  ______________________

_______________________________
______________________(Partner)

Last updated May 24, 2022

What is a Partnership Agreement?

A Partnership Agreement is a contract between two or more business partners. The partners use the agreement to outline their rights responsibilities, and profit and loss distribution. The agreement also sets the general partnership rules, like withdrawals, capital contributions, and financial reporting. LawDepot's template allows you to create a general partnership agreement.

A general partnership involves two or more general partners who have formed a business for profit. Each partner is equally liable for the debts and obligations of the company and the actions of the other partner(s).

A partner doesn’t need to be an individual. A partner can also be a corporation or another business entity. It’s important to specify a partner’s legal status because it can have tax implications.

A Partnership Agreement is also known as a:

  • General Partnership Agreement
  • Partnership Contract
  • Articles of Partnership
  • Business Partnership Agreement

Who needs a Partnership Agreement?

Any two or more people who run a for-profit business together, including family, spouses, friends, or colleagues, should have a Partnership Agreement.

A Partnership Agreement sets out guidelines and rules for business partners to follow to avoid disagreements or issues in the future.

Why is having a Partnership Agreement valuable?

A Partnership Agreement is valuable because it sets out each partner's rights and responsibilities. Further, it allows the partners to customize the law as it applies to their partnership.

Although it's perfectly legal not to have a Partnership Agreement, they come with their advantages. Without an agreement in place, your business is subject to the standard statutes on partnerships in your state. In the United States, 37 states follow the Revised Uniform Partnership Act, and it might have provisions that aren't suitable for your particular partnership or business. By creating your own agreement, you take control of the specifics and customize the applicable law to suit your company perfectly.

For example, a partner leaving the company will cause the dissolution (or end) of the partnership in some states. With a customized Partnership Agreement, you can include clauses to ensure that the default rule doesn't apply to your partnership. Instead, you can make it possible for the remaining partners to buy out the exiting partner's interest in the partnership.

What should I include in a Partnership Agreement?

Before you begin creating your Partnership Agreement, there are some crucial details about the partnership to sort out with your partners.

Have details regarding the following topics on hand when creating your document:

  • Capital contributions
  • Profit and loss distribution
  • Management and voting
  • Partnership tax elections
  • Partnership withdrawal
  • Partnership dissolution

How do I create a Partnership Agreement?

You can easily create a Partnership Agreement by filling out LawDepot's questionnaire. Using our template will ensure you complete the necessary steps:

1. Specify the type of business you’re running

Start the creation of your Partnership Agreement by specifying the industry your business is in and the type of business it is.

LawDepot’s Partnership Agreement questionnaire lets you pick from four types of industries:

  • Retail
  • Professional services
  • Food and accommodations
  • Arts, entertainment, recreation
  • Other (if your business doesn’t fall under any of the industries listed)

Your business type can be described by the service you’re providing (e.g., bookkeeping, clothing store, dine-in restaurant).

2. State your place of business

Different states have varying rules and regulations for partnerships. Select the state you're operating in, and LawDepot will customize your Partnership Agreement to meet its requirements.

3. Provide partnership details

Include your partnership’s name and address in the agreement.

Before selecting a name for your partnership, it's recommended that you perform a business name search to avoid choosing one that sounds similar to another business in your industry. Business name registration laws prohibit businesses from having similar names because it can confuse customers.

Include the partnership’s address, city, state, and ZIP code in your agreement. The address is usually the location of your business’ main office or headquarters. You can use one of the partners’ home addresses if your business doesn’t have a premises.

4. State the partnership’s duration

State the date that the partnership will begin and how it will end, if you know. You can choose to end the partnership on a specific date or when the partners decide to dissolve the partnership.

5. Provide each partner’s details

Provide the name and address of each partner, and specify if they’re an individual, corporation, partnership, trust, or LLC.

6. State each partner’s capital contributions

Capital contributions are the amount of time, money or assets each partner gives to the business or partnership. The more a partner contributes, the more equity interest they'll have in the company. Each partner receives a percentage of ownership based on their capital contribution.

Specify the monetary value of each contribution in your Partnership Agreement. The capital contributions can come in the form of cash, equipment, time and effort (in place of cash equity) or in some other way (e.g., a free loan of a personal vehicle to partnership).

A Partnership Agreement can include non-monetary contributions as long as the partners can calculate and agree on the contributions' value.

Also, include the date that initial capital contributions are due.

7. Outline the admission of new partners

If you and your partners allow new members, specify how you'll decide on admissions to the partnership. LawDepot's Partnership Agreement template gives you the option of a majority vote or a unanimous vote of the partners.

8. Outline how a partner can voluntarily withdraw from the partnership

If the partnership contract permits withdrawal, a partner may make an amicable exit so long as they adhere to the agreement's notice period and other terms specified. If a partner wishes to withdraw, they can do so using a Notice of Withdrawal from Partnership form.

Our questionnaire allows you to set the necessary notice period at three months, six months, one year, or two years. It’s a good idea to set notices because a partner’s departure can have huge consequences for the business, especially in a small partnership.

You can also decide if a partner leaving will automatically cause dissolution of your partnership.

9. Determine terms for the partnership’s dissolution

Dissolving a partnership is a significant decision that may have varying consequences for each partner. It’s generally recommended that your partnership require a unanimous vote to dissolve it.

Some of the most common reasons partners may dissolve a partnership include:

  • All partners agree on a specified end date for their partnership
  • The partnership completed all its projects or fulfilled its purpose
  • The business is no longer profitable
  • The death of a partner
  • The bankruptcy of a partner or the partnership
  • A partner withdraws from the partnership

How the partners distribute the business’ assets on dissolution can factor into how each member votes in the decision to dissolve the partnership.

The options for distributing assets among the general partners are:

  • Equal shares for each partner
  • In proportion to capital contributions
  • Fixed percent

10. Set rules for calling partners meetings

A partners’ meeting is when the members of a partnership come together to make critical business and financial decisions.

Decide if the partners will hold meetings weekly, monthly, quarterly, annually, or as required. You’ll also need to determine if special meetings can be called by any partner or a majority of partners.

11. Appoint a managing partner

A managing partner is responsible for the overall management and day-to-day operations of the partnership. They're also someone who has an ownership interest in the partnership.

Decide if a managing partner will be appointed or if all the partners will participate in managing day-to-day operations. You'll then need to decide if a unanimous or majority vote of the partners can remove the managing partner from their position.

Certain matters will still require a partners' vote even if the partners appoint a managing partner.

12. Determine the voting method

Partners are jointly liable for decisions made on behalf of the partnership, even if they weren’t involved or consulted. Some decisions can change the nature of your business, which can bring unanticipated risk to partners that aren’t as financially secure as the others.

When making decisions with a vote, you can give some partners more power than others. Determine if voting power is based on a partner's proportion of aggregate capital contributions, the proportion of profit shares, or if they'll all have equal voting power (one partner, one vote).

13. Decide which partners have signing authority

Any person who has the authority to sign contracts on the partnership's behalf can significantly impact your business and the rest of the partners. Decide if the authority to sign contracts will be given to any partner, a managing partner, or subject to a partnership vote.

The partnership must communicate any variation to the presumed authority of the partners to third parties, vendors, and business associates.

Because some business decisions involve significant new risks for a partnership, it’s sometimes appropriate to require the consent of all partners in order to protect everyone’s interests.

Some decisions that might be better off with unanimous consent include:

  • Assigning company check signatories
  • Assuming new debts over a certain amount
  • Incurring new expenses over a certain amount
  • Selling a partnership asset over a particular value
  • Hiring new employees where salary is over a certain amount
  • Firing employees
  • Releasing partnership claims except for payment in full
  • Decisions affecting the unusual use or lending of partnership equipment

15. Determine how you'll make significant business and financial decisions

Determine if the partnership will make business and financial decisions with a unanimous or majority vote of the partners according to your chosen voting method.

Business decisions include all actions regarding the management, operation, and control of the partnership and its business. Financial decisions include distribution of profits, allocation of losses, and other financial matters.

16. Determine the method for distribution of profits and losses

Decide how the partners will distribute the profits and losses:

  • Fixed Percent: A percentage of the profit and losses that doesn’t change. The numbers must add up to 100% between all partners.
  • Equal Share: Profits and losses are distributed evenly between partners.
  • In proportion to capital contributions: the share of profits and losses depends on how much each partner has invested.

17. Determine if partners will receive compensation

The members of a partnership have the option to compensate a partner as they see fit for services rendered to the partnership. The compensation is in addition to the regular personal cash withdrawals that partners can take from the partnership's earnings.

18. Address tax elections

Federal tax audit rules allow the Internal Revenue Service (IRS) to treat partnerships as taxable entities and audit at a partnership level instead of conducting individual audits of the partners. That means that depending on the partnership's size and structure, the IRS can treat the partnership as a taxable entity rather than auditing each partner individually.

Partnerships that have 100 or fewer partners and are not multi-tiered (i.e., which have no partners that are themselves partnerships, LLCs, or trusts) are eligible to elect out of the application of the rules on an annual basis partnership return.

Partnership agreements should address certain tax elections and choose a partner for the role of partnership representative. The partnership representative serves as the figurehead for the partnership under the new tax rules.

Law Depot's Partnership Agreement explains the rules clearly and allows you to:

  • If eligible, choose whether the partnership wishes to elect out of the new tax elections. If the partnership elects out, they must renew this decision annually when filing tax returns.
  • Make the partnership representative answerable to the partners in their dealings with the IRS.
  • Elect to have each partner individually assessed for their share of the tax liability if an audit assesses a tax liability at partnership level.

19. Appoint a Partnership Representative

A Partnership Representative is appointed to act on the partnership's behalf with sole authority when dealing with audit procedures.

Suppose your partnership isn't eligible to opt-out (or chooses not to opt-out) of the tax audit rules introduced by the Federal Bipartisan Budget Act of 2015. In that case, the IRS can treat the partnership as a single taxable entity and deal with a single "Partnership Representative" at audit time.

The Partnership Representative is empowered to make all audit-related decisions on the partnership's behalf in dealings with the IRS. Individual partners no longer have statutory rights to be informed of dealings with the IRS.

Individual partners may no longer negotiate settlements with the IRS or make appeals against any settlement made between the IRS and the Partnership Representative. It's essential your Partnership Agreement clearly defines the role of the Partnership Representative and its accountability to the partners.

The Partnership Representative doesn't have to be one of the partners. Since the role has consequences for all partners, and the IRS doesn't have to notify partners individually, there could be problems if the partner-appointed Partnership Representative isn't available or is hindered.

Some partnerships may choose to appoint a tax attorney or accounting firm to the role to ensure continuity and expertise. Note that any representative you select must have a substantial presence in the United States.

20. Set a date for when the fiscal year ends

A fiscal year is a one-year period a company chooses to report financial information such as:

  • External audits
  • Federal tax filings
  • Financial reports

A company's fiscal year doesn't need to start on Jan. 1 and end on Dec. 31. It only needs to be a 12-month period that allows a company to calculate its earnings from year to year accurately.

21. Outline what an annual report includes

In addition to the federal income tax report that’s automatically included in your annual report, your annual report can also feature the following:

  • Income statement: the company’s financial performance
  • Balance sheet: the company’s assets (including capital contributions) and liabilities (including any money borrowed from partners aside from their capital contributions)
  • Cash flow statement: the amount of cash (and cash equivalents) coming in and out of the company
  • Profit and loss summary: costs, expenses, and revenues gathered

The federal income tax report is already included in your annual report because each partner needs a copy for calculating their personal income tax.

22. State how disputes will be resolved

A time may eventually come when the partners clash with each other. Having a plan for handling disputes in your Partnership Agreement can help avoid costly litigation.

If you choose to have a dispute resolution plan to avoid going to court in your agreement, your options are mediation, arbitration, or mediation followed by arbitration.

Mediation is a negotiation between two parties guided by a neutral third party called a mediator. The mediator doesn't have the authority to decide on the disputing parties' behalf. Their role is to assist the parties in finding a resolution.

Arbitration is an alternative to going to court. The disputing parties agree to have one or more arbitrators act as a judge by reviewing any evidence and making a binding decision regarding their dispute.

23. Sign the Partnership Agreement

A witness isn’t necessary for creating a legally binding Partnership Agreement. However, it’s a good idea to have one in the event the execution of your agreement is ever challenged.

If you include a witness, they should be a neutral third party with no personal or business ties to you or any of the other partners.

Can I change or modify a Partnership Agreement?

Yes, it’s sometimes necessary to update the partnership agreement. A Partnership Agreement can be changed or modified at any time with the unanimous agreement of the partners.

Related Documents:

  • Notice of Withdrawal from Partnership: a notice used to inform partners of the intended withdrawal of a partner from a business partnership
  • Assignment of Partnership Interest: a contract used to transfer partnership interest from one partner to another
  • Partnership Amending Agreement: an agreement used to amend or modify the terms of a partnership agreement
  • Joint Venture Agreement: a document used to spell out the details in which two parties unite resources for a common goal or project
  • LLC Operating Agreement: an agreement that outlines the rights and responsibilities of the company's members and establishes the rules and operating details for a limited liability company
  • Business Plan: a comprehensive document defining a company's mission, values, goals, marketing and sales plan, financial projections, employee and management information
  • One Page Business Plan: a succinct, one-page version of our Business Plan to help you outline your business's goals and how you plan to achieve them.
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