Partnership Agreements
Those who own a business, with at least one other person and have not fashioned the business as a limited liability company (LLC), a corporation (Inc.) or another kind of business, have a partnership.
Although partnerships do not require a written agreement, one is usually recommended. Otherwise, the state law determines the rights and obligations of each partner. With a written agreement, each partner will have a part in determining how the partnership will operate.
Items that are usually addressed in the agreement include:
• Management
• Control and authority of the business
• Methods to fund the business
• Capital contributions
• Partner salaries
• Allocation of profits and losses
• New partner admissions
• Buyouts
• Determining the value of a partner’s share
Why a Partnership Agreement is Essential
Without an agreement, under the majority of state laws, it is assumed that each partner shares equal control over the business. Any of the partners have the ability to obligate the other partners and the business.
With a partnership agreement, what each partner is responsible for can be stated in the agreement. Voting rights, as well as profit and loss allocation should also be outlined in the partnership agreement.
If some partners work the business, while others do not, the salary for each partner that does, would be found in this agreement.
If there is no partnership agreement made, the assumption will be that all the partners will be actively involved and working daily. In this case, none will receive a salary. This could be seen as unfair to a partner that contributes extra effort by running the business single-handedly, every day.
Capital contributions may also need to be addressed in the agreement. If more capital is necessary, will every partner contribute equally?
The agreement should also address the prospect that a partner may need to submit to a buyout. Address situations or reasons allowing the removal of a partner due to his inability to run the business appropriately.
If all partners do not contribute equal amounts of capital, will other aspects of their partnership be affected?
At some point in time, the need may arise to add a new partner to the business. In the agreement, the process for adding a new partner can also be outlined. Specifying, what kind of agreement is necessary among the partners to add the new partner. For instance, a two-thirds majority may justify the addition.
Does every partner have an equal vote? If not, are voting rights based on the capital contributions made by the partner?
For those interested in addressing these issues, a written partnership agreement is necessary. Any partnerships that do not have their own written agreement will be governed by the laws of the state where the partnership is formed.
*The statements above largely apply to corporations and LLCs as well. Contact my office if you have legal questions pertaining to your business.
Law Office of Ryan C. Young, PLLC | Richmond, VA