Partnerships are business structures that allow two or more individuals or entities to join their efforts for the purpose of participating in business opportunities. Most states allow partnerships to form and organize in their jurisdictions according to a Uniform Partnership Act that sets certain rules for the formation, ownership, duties of partners, dispute resolution, and dissolution.
A partnership agreement, also known as articles of partnership, is a legally-binding contract between parties who agree, at a minimum, on the following points:
- Capital contributions
- Duties as partners
- Amount of work to perform
- Sharing and assignment of profits
- Acceptance of liabilities
Some states require a partnership agreement to be filed along with business formation documents, but all partnerships should draft and execute their own contact or articles. With regard to the Uniform Partnership Act, the agreement executed by the business partners will usually have more control than the statutes, unless issues of bad faith arise.
The partners must be clearly identified in the agreement along with the name of the business. It is always a good idea to choose a fictitious or trading name that can later be used for marketing purposes; in this case, a formal registration of the name, often referred to as a DBA, should be made with the Secretary of State.
The initial contributions made by all partners and the ownership interest they will take are crucial elements of the partnership agreement, but they can always be amended later. Cash is the most typical contribution, although property, securities, assets, and even certain skills can also be listed as valid business contributions. The ownership interest is expressed as a percentage.
When it comes to determining the allocation and distribution of profits, the partners have many options. A proportionate allocation is typical; for example, two women agree to operate a hair salon and take 50 percent ownership. An easy way to determine profit allocation is to take the amount earned during a certain period and divide by two. As an alternative, partners may agree to draw a fixed monthly income and wait until the end of a quarter, or even the end of a year, to share the profits.
The level of authority is also crucial to the operation of business partnerships. This is often called signature authority, and it may be delegated to a single partner for the sake of efficiency. Assigning signature authority to one individual saves the trouble of multiple partners having to sign for a loan or a service contract. The same goes for the business decision-making process; multiple partners may wish to stipulate in the agreement that a voting system should take place when it comes to making important decisions.
An alternative to signature authority and voting is to assign a partner as a business manager, clearly stating in the agreement his or her duties and the exact level of authority.
The agreement should also include provisions for buyouts and expansion, particularly with regard to the admission of new partners and the conditions for doing so. If one of the partners wishes to leave the company without completely dissolving the business, the agreement must include a section outlining the process.