Partnership Agreement FAQ - United States
From LawDepot Law Library
A Partnership Agreement provides a contract for two or more individuals or entities to form a business partnership.
What is a partnership?
What is a partnership?
A partnership is a form of business organization in which two or more individuals manage and operate the business with a view to making a profit. Each partner shares a fixed proportion of the partnership profits and losses. Depending on the type of partnership, each partner may be personally liable for the debt and obligations of the company. One benefit of a partnership is that partnership income is only taxed once. Partnership income flows through to the individual partners who will be taxed on their partnership income. This contrasts with a corporation where income is taxed at two levels. Corporation income is taxed twice: first as a corporate entity and also at the shareholder level where shareholders are taxed on any dividends received.
What is the difference between a partnership and a joint venture?
A joint venture can be distinguished from a partnership where a joint venture is usually limited in scope to a single project or is limited in duration to a specific time frame. In addition although the members of a joint venture will share the burden of costs in the venture, profits will be managed by each member. For example: Two related companies may work together in a joint venture to research and develop a specific product but once the product is complete each member will take the resulting product to their respective marketplace to be marketed and sold for the exclusive profit of that individual member. In this case each member would not share in the profits of another member. Each member will benefit from their own ability to exploit the product within their respective marketplace. This differs from a partnership where partners share directly in a common cost and profit pool.
Depending upon your jurisdiction there may be tax benefits for a joint venture over a partnership where a member of a joint venture may be treated differently from a partner in a partnership.
Limited Liability Company (LLC)
Is a Partnership Agreement good enough for my LLC?
No. In a General Partnership, each Partner is liable for all debts and obligations of the Partnership. If one or more of the remaining Partners are unable to meet their obligations to the Partnership then the remaining Partner(s) are liable for the full debts of the Partnership. In the case of an LLC, each Member has limited liability and is protected in a similar manner to the shareholders in a corporation. In general then, an LLC would not want to create and distribute ambiguous or misleading documents (such as a General Partnership Agreement) where clients and other business associates may rely on the liability characteristics of a general partnership and, if harm should result, then that reliance might be used in court to defeat the limited liability protection of the LLC.
How are partnerships created?
How are partnerships created?
Partnerships can be created by contracts, such as this one. But even where no formal contract exists, the courts may find a partnership based on the characteristics of the relationship between the parties. All the relevant terms of the partnership should be expressly included in the partnership contract. If you do not have a partnership contract in writing and the partnership breaks down then it will be up to the courts to create the terms of the partnership. These terms may not be what the parties intended. By using this contract, you are ensuring that the terms of your partnership agreement are what you intend them to be.
How does a partnership end?
The parties can expressly agree that a partnership will end at a specified date, or upon completion of certain tasks. In some jurisdictions a partnership may end on the death or bankruptcy of a partner unless the partnership agreement expressly states otherwise. Absent an agreement, partners can make a written submission to the other partners to have themselves withdrawn from the partnership. A partnership agreement should protect the partnership and remaining partners from the withdrawal of an essential partner. If the voluntary withdrawal of a partner offends a term of the partnership agreement then the withdrawing partner may be liable for any damages suffered by the partnership or remaining partners.
Where do I file my General Partnership Agreement?
You do not file your general partnership agreement. The general partnership agreement is simply an agreement between the partners. Only companies such as LLP, LLC, and corporations, where there is limited liability for the owners, are required to register. The partners in a general partnership have unlimited liability for the debts and obligations of the partnership.
What are the different types of partnership?
What are the different types of partnership?
Partnerships can be either general partnerships, or limited partnerships. Limited partnerships consist of one or more general partners and one or more limited partners. A general partner actively manages the business and may contribute capital to the partnership. A limited partner will contribute capital to the partnership but will have no active role in running the business. A general partnership consists only of general partners who all have unlimited liability for the debts and obligations of the partnership. Our partnership agreement is intended for a general partnership and is not suitable for use by a limited partnership.
What is a general partner?
A general partner contributes money to the partnership, likely has a say in the day-to-day operations of the partnership, and has unlimited liability for the debts and obligations of the business. A limited partnership must have at least one general partner who will have unlimited liability for the debts and obligations of the partnership. All partners in a general partnership are general partners and all have unlimited liability.
What is a limited partnership?
Limited partnerships consist of one or more general partners and one or more limited partners. A general partner actively manages the business and may contribute capital to the partnership. A general partner has unlimited liability for the debts and obligations of the business. A limited partner will contribute capital to the partnership but will have no active role in running the business. The liability of a limited partner is limited to the amount of capital they contributed to the partnership. Our partnership agreement is intended for a general partnership and is not suitable for use by a limited partnership.
What is a limited partner?
A limited partner only contributes money to a limited partnership. They do not have any control of the day-to-day operation of the partnership. Their liability is limited to the amount of capital they contributed to the partnership. A limited partner that participates in management of the partnership may be exposed to the same liability as a general partner. A limited partner will have the right to participate in any decisions that affect their partnership interest such as amending the partnership agreement or admitting a new partner unless these rights are restricted by the partnership agreement. Their liability is limited to the amount of capital they contributed to the partnership. A general partnership will not have any limited partners.
What is a managing partner?
A partnership may have a managing partner who is responsible for managing the business. The managing partner will make all the day-to-day decisions of the partnership. The managing partner will have unlimited liability for the debts and obligations of the company. All partners in a general partnership will have the right to participate in the management and control of the partnership unless the management obligations are delegated to one or more managing partners in the partnership agreement.
What is a partnership at will?
A partnership at will is intended to continue for no fixed period of time at the pleasure of the partners. It may be dissolved by any partner without notice or with notice as expressly stated in the partnership agreement.
Duties and obligations of a partner
What are the legal consequences of being in a general partnership?
First please note that these consequences only apply to a general partnership where all partners are equal.
The first major consequence of being in a partnership is joint and several liability for all debts of the partnership. This means that all partners are equally and personally liable for the debts from the business. In addition, if one partner is unable to pay their portion of a partnership debt the remaining partners will be liable for the unresolved debt.
Another legal consequence of a partnership is that all partners are agents of the partnership and may bind the partnership and thus their partners to outside parties. This is because all partners are agents of the partnership. This agency means that you will be responsible for all contracts created by your partners in the name of the partnership for activities normally carried out by the partnership. For example, a partner can bind you to a contract with a supplier but cannot bind the partnership for a family trip to Disneyland unless the other partners expressly authorized the expense for the Disneyland trip.
A further legal consequence for partners, as with all types of businesses, is that partners can be held liable for the actions of their employees.
Another consequence for partners deals with the taxation of a partnership. The partnership itself does not pay any taxes, though it may have to report its profits to the appropriate tax collection agency. The taxes are paid by the partners individually at their personal rate of taxation. This flow-through taxation also means that any partnership losses may be deducted from the individual partner's other sources of income.
What sort of duties and obligations do I have with my partners?
Partners owe each other, and the partnership, a fiduciary duty. You cannot compete with the partnership by having a similar business in the same geographical area, and you cannot take opportunities for yourself that the partnership may want to pursue, and you cannot act either willfully or recklessly in a manner that will harm the partnership.
What other factors do I need to consider before entering into a partnership agreement?
While there are many other factors that need to be considered, such as the trustworthiness of your partners, the single most important factor to consider is the future growth of the company. Partnerships are ideal for lifestyle companies, and slow progressively growing companies. However, if you have a great idea that has significant risk and if you want to limit your risk, then you may want to consider incorporating your company.
How can I limit the authority of my partners to sign contracts that bind the partnership?
If you give notice to outside parties that the partner has no authority to make the contracts or perform any other actions that may bind the partnership then the partnership will not be bound by those actions. In a general partnership, limiting the authority of a partner to enter contracts on behalf of the partnership does not affect their standing as a general partner nor their joint and several liability for the debts and obligations of the partnership.
Can a partner transfer their interest in the partnership?
Yes, a partner can transfer their interest in the partnership, if the partnership agreement does not restrict the transfer. If a partner incurs debts or becomes bankrupt then a third party may have a claim against the partner's interest in the partnership. However, depending on the terms of the partnership agreement, the recipient of a transferred interest may not be given any power to vote or to participate in decision-making. The rights and obligations of a recipient of a partnership interest may be limited to the profits and losses of the partnership. This is to ensure that the remaining partners are not affected by the extravagance or incompatible notions of a new partner who was not a participant in the original partnership agreement.
Can a partnership own assets like a corporation does?
Yes, assets can be acquired by the partnership. This is done either by a partner transferring property to the partnership, or the partnership using its profits and other assets to acquire more property. Property acquired by the partnership is held in the name of the partnership but is not property of the partners individually. If property is held in the name of a partner it may not be partnership property even if it is used by the partnership.
Why should I use mediation or arbitration instead of going to court?
Mediation and arbitration are superior processes when there is a long term relationship involved and the survival of the partnership is desirable. They focus on creating a mutually agreeable solution to a problem instead of the adversarial approach experienced in a courtroom confrontation. In addition to this, the process can be less expensive, and more expedient and efficient than the court process.
What is the difference between mediation and arbitration?
Mediation is a method of dispute resolution where the parties resolve disputes with the help of a neutral third party (mediator). The mediator does not have the power to make decisions or to enforce decisions against the parties.
Arbitration is a method of dispute resolution where the parties agree to abide by the decision of an neutral third party (arbitrator).
Do I need to register my general partnership agreement with the local, state, or county government?
Generally no. While you are always free to register your partnership with the state government, only under some circumstances are you required to register your partnership with the local, state, or county government. The requirements differ for each state. Please contact the commerce department or section in your jurisdiction to determine if you are required to register your partnership.
Why would the partnership want an initial period of prohibition on withdrawal?
Partners in a partnership have a duty to function in the best interest of the partnership and each other. By enforcing a prohibition on withdrawal, individuals will be motivated to take their responsibility as a partner seriously and commit to at least a minimum period with the partnership. The other partners can then feel comfortable relying on the commitment of their fellow partners to the purpose and goals of the partnership.
What is a Tax Matters Partner?
The Tax Matters Partner prepares and submits all tax returns and reports as required by the taxation legislation.
Issues requiring unanimous consent
Why would the partnership agreement require unanimous consent on some conditions but not others?
In general, business decisions will be resolved by a majority vote of the partners. However where the impact on individual partners will be significant, the partnership may wish to resolve these decisions through a unanimous vote in order to protect the interests of individual partners. The partners may want to require unanimous consent for areas that are deemed critical to the success of the partnership, such as hiring/firing of employees or things that will affect the interests of all existing partners and their stake in the enterprise such as bringing on a new partner or acquiring or selling partnership assets or assuming substantial debt.
Under the section 'Actions that require Unanimous Consent of the Partners', what is meant by the option 'Assignment of ownership rights of Partnership Property'?
Individual partners do not have property rights in partnership property. In order to protect the interests of all partners from unauthorized behavior involving partnership property, the partners may want to enhance the control over the use and disposition of partnership property by requiring unanimous consent on issues involving the use and assignment of property rights in partnership property.
Under the section 'Actions that require Unanimous Consent of the Partners', what is meant by the option 'Incurring total Partnership liabilities over a fixed dollar amount'?
All partners are jointly and severally liable for the debts and obligations of the partnership. Where expansion of the partnership requires a significant financial investment involving a large debt load, the interests of all partners must be considered before proceeding with that risk. Where the risk is great and where an individual partner may lose some or all of their personal holdings then the partnership may wish to protect the interests of individual partners in the partnership agreement. Within the partnership agreement the partners can agree what level of liability(dollar amount) is acceptable. Any liability over that amount would require the unanimous consent of all partners. Any liability under that amount would only require the consent of a majority of the partners.
Under the section 'Actions that require Unanimous Consent of the Partners', what is meant by the option 'Incurring single transaction expenditures over a fixed amount'?
All partners are jointly and severally liable for the debts and obligations of the partnership. Individual partners may be exposed to varying degrees of personal risk as the result of the failure of the partnership. A wealthy partner may be much more willing to accept substantial risk. A less wealthy partner may be risking all personal assets. To protect the interests of all partners, the unanimous consent of all partners may be required when making substantial purchases.
Under the section 'Actions that require Unanimous Consent of the Partners', what is meant by the option 'Sale of a Partnership asset with fair market value greater than a fixed amount'?
Sale of significant partnership assets should require the unanimous consent of all partners so that the interests of all partners are protected. An individual partner cannot sell or otherwise dispose of partnership property. This option includes the situation where an individual partner cannot use partnership property as collateral for a loan (either a personal loan or a partnership loan) without the majority or unanimous consent of the partners where the property could be subject to seizure if the loan was in default. Ensure the fixed amount selected is practical for the size of the partnership. It may be an unnecessary administrative burden to require unanimous approval for the sale of nominal assets.
Under the section 'Actions that require Unanimous Consent of the Partners', what is meant by the option 'Releasing any Partnership claim except for full consideration'?
Where the partnership has a claim against another person or business entity or where a debt is owed to the partnership it is in the best interest of the partnership and the individual partners if these obligations owed to the partnership are paid in full. Whenever an obligation is to be released for less than full consideration it is important that the interests of each partner is represented and each partner is allowed to provide or reasonably withhold consent to the transaction.
Under the section 'Actions that require Unanimous Consent of the Partners', what is meant by the option 'Endangering the ownership or possession of Partnership property'?
Individual partners do not have property rights in partnership property. Where partnership assets are put at risk either by loaning to a third party or placing the asset in an environment where the asset is subjected to theft or loss affects the interest of all partners. In these situations the partnership may wish to require the unanimous consent of all partners.