Partnership agreements are written documents that explicitly detail the relationship between the business partners and their individual obligations and contributions to the partnership. Since partnership agreements should cover all possible business situations that could arise during the partnership’s life, the documents are often complex; legal counsel in drafting and reviewing the finished contract is generally recommended. If a partnership does not have a partnership agreement in place when it dissolves, the guidelines of the Uniform Partnership Act and various state laws will determine how the assets and debts of the partnership are distributed.
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Recommended Elements Of The Partnership Agreement
1. Name and address of partnership.
2. Duration of partnership—Partners can point to a specific termination date or include a general clause explaining that the partnership will exist until all partners agree to dissolve it or a partner dies.
3. Business purpose—Some consultants recommend that partners keep this section somewhat vague in case opportunities for expansion arise, while others emphasize clear-cut and unambiguous entrepreneurial goals.
4. Bank account information—This section should note which bank accounts are to be used for partnership purposes, and which partners have checksigning privileges.
5. Partners’ contributions—Valuation of all contributions, whether in cash, property or services.
6. Partners’ compensation—Determine in detail how and when profits (and salaries, if applicable) will be distributed.
7. Management authority—What are the operational responsibilities of each partner? Will partners be able to make some decisions on their own? Which decisions will require the unanimous consent of all partners? What are the voting rights of each partner? How will tie votes be resolved? 8. Circumstances under which new partners might be admitted into the partnership.
9. Work hours and vacation.
10. Kinds of outside business activities that will be allowed for partners.
11. Disposition of partnership’s name if a partner leaves.
12. Dispute resolution—Stipulates what kinds of mediation or arbitration will be utilized in the case of disputes that cannot be resolved amongst the partners. This is a way to avoid costly litigation.
13. Miscellaneous provisions—This portion of the agreement might delineate the circumstances under which the agreement could be amended, for example.
14. Buy-Sell Agreement.
The Buy-Sell Agreement The buy-sell agreement is one of the most important elements of any partnership agreement. Lance Wallach summarized the problem in an article for Accounting Today: “Large problems can result from the death, incapacity, resignation, etc., of one of the owners,” Wallach wrote. “How would the decedent’s heirs liquidate the business interest to pay expenses and taxes? What would happen if an heir or an unknown outside buyer of the decedent’s share decides to interfere with the business? Could the business or other owners afford to buy back the decedent’s ownership interests?” A buy-sell agreement is intended to forestall all such problems. In essence, it specifies the terms of a buyout in the event of death, divorce, disability, or retirement. The buysell agreement has become a “must” in many instances in which a partnership is seeking financing—a loan or a lease.
Lenders want to see the agreement and study its provisions.
The two primary structures for buy/sell agreements are cross-purchase agreements, in which the remaining partnership owners buy the departing partner’s stock or partnership interest, and the stock-redemption agreement, in which the company buys the stock of the departing owner. Life insurance policies are the more typical technique employed to ensure that funds are available for crosspurchase transactions. With two partners in a business, the solution is very straightforward but requires more ingenuity to set up with multiple shareholders. With stock redemption agreements, on the other hand, the insurance would be written in favor of the company. One of the benefits of a buy-sell agreement is that, with the partners able to reach agreement, more innovative methods of solving the problem can be worked out and codified.