What is a Partnership Agreement?

Partnership Agreement

Alternate Names:

A Partnership Agreement is also known as:

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

What is a Partnership Agreement?

A Partnership Agreement is a contract between two or more business partners that is used to establish the responsibilities, and profit and loss distribution of each partner, as well as other rules about the general partnership, like withdrawals, capital contributions, and financial reporting.

LawDepot’s Partnership Agreement allows you to create a general partnership. A general partnership is a business structure involving two or more general partners who have formed a business for profit. Each partner is equally liable for the debts and obligations of the business, as well as the actions of the other partner(s).

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 so that they can avoid disagreements or issues in the future.

What is included in a Partnership Agreement?

LawDepot’s partnership contract includes information about the business itself, business partners, profit and loss distribution, as well as management, voting methods, withdrawal and dissolution. These terms are explained in more detail below:

Capital Contribution

Each partner receives a percentage of ownership based on his or her capital contribution.

Profit and Loss Distribution

As agreed to by partners, profits and losses can be distributed by:

  • Fixed Percent: This number is a fixed percentage (e.g. 45, 55). 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 the partner has invested.

Management and Voting

Partnerships can be managed by a designated managing partner, through majority voting, or by unanimous vote by all partners.

Voting can be carried out through three possible methods:

  • Proportional to Contributions: Voting powers reflect each partner’s capital contribution.
  • Proportional to Profit Share: Voting powers are assigned according to profit distribution.
  • Equal Vote: Voting power is equal, and each partner is assigned one vote.

Partnership Tax Elections

Federal tax audit rules allow the IRS (Internal Revenue Service) to treat partnerships as taxable entities and audit at a partnership level instead of conducting individual audits of the partners. This means that depending on the size and structure of the partnership, it is possible for the IRS to audit the partnership as a whole, rather than auditing each partner individually.

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:

  • Choose whether the partnership wishes to elect out of the new tax elections, if eligible. If the partnership chooses to elect out, they must renew this decision annually.
  • 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.

Partnership Withdrawal

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

Partnership Dissolution

Partners may indicate how assets are distributed between partners in the event of dissolution.

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

  • All partners agree on a specified end date for their partnership
  • All projects have been completed or the purpose of the partnership has been fulfilled
  • The death of a partner
  • Bankruptcy of a partner or the partnership
  • A partner withdraws from the partnership

Related Documents:

Frequently Asked Questions:

Partnership Agreement FAQ

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