Whether a company requires a business partnership agreement depends on its structure and ownership. A partnership agreement outlines the rights and responsibilities of each partner, the allocation of profits and losses, the decision-making process, and how the partnership can be dissolved.
Without a partnership agreement, partners may be left without clear guidelines and could face disputes or legal issues in the future. With the help of board management software, board members can effortlessly create and store important documents, like a partnership agreement template or a confidentiality agreement.
What is a Partnership Agreement?
A partnership agreement, like a contractor agreement, is a legally binding document that specifies the terms and conditions of a collaboration between two or more individuals or entities. Its purpose is to define each partner’s rights and responsibilities, including their obligations, roles, and how profits are shared.
The partnership agreement covers essential aspects of the partnership, such as
- The purpose of the partnership
- The duration of the partnership
- The capital contributions of each partner
- The division of profits and losses
- The decision-making process
It may also address other issues like ownership and transfer of partnership interests, dispute resolution mechanisms, and provisions for dissolution and termination of the partnership.
A partnership agreement protects the interests of all partners and helps prevent misunderstandings and conflicts.
In addition to the factors mentioned above, the board should consider including a nondisclosure agreement (NDA) as part of the partnership agreement. An NDA is a legal agreement that protects confidential and proprietary information from being disclosed to third parties.
How to Write a Partnership Agreement
Writing a general partnership agreement is essential when two or more parties decide to form a business partnership. Use the following steps to draft a partnership agreement:
1. Outline Partnership Purpose
Outline the purpose of your partnership, including any specific goals or objectives, which will guide the partners in their decision-making and help ensure the partnership’s success. This section should include what the primary business of the partnership is, what type of business entity is being formed, who is eligible to become a partner, and how many partners there will be.
2. Document Partner’s Name and Business Address
Include each partner’s full legal name, business name, and business address. Make note of which business activities will be performed at these locations. This information helps to identify each partner and their role in the partnership, and is also necessary for legal and tax purposes.
3. Document Ownership Interest and Partner Shares
The general partnership agreement outlines each partner’s interest, investment, and percentage—which determines the distribution of profits and losses. This part of the agreement should detail how these ownership interests may be transferred or sold and how new partners may be admitted.
4. Outline Partner Responsibilities and Liabilities
Specify each partner’s duties, obligations, and expectations, including their level of involvement in the partnership’s operations. The agreement should also detail the extent of each partner’s liability for debts and obligations incurred by the partnership.
5. Consult With a Lawyer
Consult with a lawyer to ensure the agreement is legally binding and enforceable. They can also help identify potential legal issues and draft clauses to protect the interests of all partners.
By consulting with a lawyer, partners gain greater peace of mind knowing their agreement is comprehensive and complies with relevant laws and regulations.
Stages of a Partnership Agreement
The stages of a partnership agreement include:
1. Initial Partnership
This stage involves determining the business’s nature, each partner’s roles and responsibilities, and the initial financial contributions required to start the partnership.
Once these initial discussions have occurred, the partners can move on to drafting and negotiating the partnership agreement.
2. Full Partnership
This phase involves the implementation of the partnership agreement, including carrying out the roles and responsibilities outlined in the contract and making decisions according to the agreed-upon process.
Partners should regularly review and update the agreement as necessary to ensure it remains relevant and effective throughout the partnership.
3. Continuity and Succession Planning
Continuity planning involves developing strategies to ensure the partnership can continue to operate through unexpected events, such as the death or departure of a partner.
Succession planning means developing a plan for how the partnership will be managed and operated when a partner decides to retire or leave the partnership.
Partnership Agreement Mistakes to Avoid
When drafting a business partnership agreement, it’s crucial to avoid certain mistakes that could lead to legal or financial issues in the future. Some common mistakes to avoid include the following:
- Failing to have the agreement reviewed by counsel to ensure it complies with relevant laws and regulations and protects the interests of all partners.
- Not reviewing partnership agreements annually to ensure they remain relevant and effective.
- Skipping key details such as the purpose of the partnership, each partner’s ownership interest, and dispute resolution procedures. Ignoring critical information can result in confusion or disputes among partners.
By avoiding these mistakes and creating a comprehensive and well-structured business partnership agreement, partners can ensure their business’s long-term success and sustainability.
Board's Role in Drafting a Partnership Agreement
The board’s role in drafting a partnership agreement depends on the structure of the organization and its board resolutions. In some cases, the board may be responsible for the following:
- Overseeing the drafting process
- Ensuring the agreement complies with relevant laws and regulations
- Protecting the interests of all partners
In other cases, the board may delegate these responsibilities to an individual or committee.
Improve Board Effectiveness With OnBoard
Joining forces with another company or individual requires a partnership agreement to outline expectations and protect each party involved. A board management platform allows your board to issue, sign, and store partnership agreements digitally and securely.
OnBoard’s board management software provides a purpose-built system of record that powers board governance and streamlines board business by enhancing security and privacy and providing real-time access to critical information and materials.
OnBoard offers collaboration tools, automated workflows, and integration with other tools to help drive better organizational outcomes.
Download our free Board Management Software Buyers’ Guide to learn more about board management software and its must-have features.
Frequently Asked Questions (FAQ)
What Should a Partnership Agreement Include?
A partnership agreement should include details such as the purpose of the partnership, ownership interest, decision-making process, responsibilities and liabilities of each partner, dispute resolution procedures, and continuity and succession planning.
What are the Legal Requirements for a Partnership Agreement?
The legal requirements for a partnership agreement require the document to outline the terms and conditions of the partnership and be signed by each partner.
Does a Partnership Agreement Need to be Notarized?
Whether a partnership agreement needs to be notarized may depend on the jurisdiction of the partnership. Some jurisdictions may require that the partnership agreement be notarized, while others may not.
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About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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