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A Partnership Agreement is a contract between two or more individuals who would like to manage and operate a business together in order to make a profit. Each Partner shares a portion of the partnership's profits and losses and each Partner is personally liable for the debt and obligations of the Partnership.
One benefit of a Partnership is that Partnership income is only taxed once. Partnership income is distributed to the individual Partners who are then taxed on the partnership income. This contrasts with a corporation where income is taxed at two levels: first as a corporate entity and then at the shareholder level where shareholders are taxed on any dividends they receive.
The Partnership Agreement describes the Partner responsibilities, outlines the ownership interest in the Partnership, defines the profit and loss distribution of each Partner, prepares the Partnership for common business scenarios, and includes other important rules about how the Partnership will be managed and conduct business.
The document is a critical foundational document for running a new business and serves to set the business up for success by ensuring clear communication and defined responsibilities for all of the Partners. This Agreement documents both contingency plans for when things go wrong as well as descriptions of the Partnership's day-to-day operations. A Partnership Agreement protects all of the Partners involved in the business and any individuals who plan to do business together should complete a Partnership Agreement.
How to use this document
A Partnership Agreement can be created either as a first step to outline Partner expectations and responsibilities before the Partners begin doing business together or after the Partnership has already been in business if a Partnership Agreement was never created and the Partners wish to codify or clarify how the Partnership operates. No matter when in the life of a Partnership a Partnership Agreement is created, the Agreement will cover the following ground:
The Agreement also includes the ability to define management roles within the corporation if the Partners wish to do so. Once the Partnership Agreement is completed, all of the Partners should sign and date the Agreement and keep copies of the Agreement for their records. If the Partners wish to change any of the terms of the Agreement, they should be sure to do so in writing.
Partnership Agreements are subject to the laws of individual states. There is no one federal law covering the requirements for a Partnership Agreement. This is because each individual state governs the businesses formed within that state.
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