Partnership Agreement Definition

Wondering what the partnership agreement definition is? Here, we’ll review the definition of a partnership agreement. We also talk about whether your small business needs a partnership agreement.

What is a partnership agreement?

A partnership agreement is a contract that governs how a small business runs its internal affairs. You write the partnership agreement upon forming the partnership to limit possible conflicts. Why is it important to write it early on? It’s easier for everyone to understand their roles, rights, and responsibilities if there is a partnership agreement from the start. Better to have that squared away from the get-go than to sort it out during a dispute later.

So what are partnership agreements? Put another way, they are the rule book for your small business. 

What businesses should have a partnership agreement?

Businesses that should have a partnership agreement include:

• General partnerships
• Limited partnerships
• Limited liability partnerships

Some states require limited and limited liability partnerships to have a partnership agreement. Even if one is not required, having the agreement serves as proof that your business is a certain type of legal entity. Let’s say that a disgruntled business partner questions the form of the business. The partner says that the business is a general partnership. You can use the agreement to show that your business is actually a limited partnership. 

Partnership Agreement Benefits

What are some partnership agreement advantages? Here are some partnership agreement benefits:

• Provides predictability 
• Avoids having default partnership rules govern your small business
• Limits liability
• Affords the partners with clarity about how to handle disputes 
• Lays out the financial details 

Potential partnership agreement disadvantages include the up-front cost of creating one. But once you have one, though, you are on your way to protecting your investment. Setting your business up for success includes drafting a well-written, comprehensive partnership agreement. 

If you decide to form a limited liability company or corporation instead of a partnership, we can help. With our help, you can form your business and write internal documents for your business in no time. 

Partnership Agreement Considerations

What should you as a business owner be thinking about when writing a partnership agreement? Things to keep in mind when writing your partnership agreement:

• Determining who the managers are 
• Deciding how people become a manager
• Detailing what management’s obligations are
• Creating a way for people to join (or leave) the partnership
• Clarifying who can (and must) vote and when 
• Laying out how people make capital contributions to the partnership
• Describing the financial structure of the partnership

Creating a business plan can make it easier to write the partnership agreement. Need help? No problem. Write your business plan with ease using our business plan template. We know you have more important things to do, so we made it easier than ever for you to draft your business plan. 

Other Names for Partnership Agreement

Partnership agreements examples include:

• General partnership agreement 
• Limited partnership agreement
• Limited liability partnership agreement
• Operating agreements (for a limited liability company)
• Bylaws (for a corporation)

Though they may have different names, each shares the partnership agreement meaning. 

Summary 

In this article, we talked about the partnership agreement definition. Then we discussed the important features of a partnership agreement. We provided some food for thought for you to use when writing your partnership agreement. 

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