Our general partnership agreement solidifies the relationship between business partners and is an important tool for laying the groundwork for a successful, long-term business venture. The following instructions provide key insights and considerations when creating this essential document.
To begin, you will include the partnership's name, effective date of the agreement, business purpose, and address. When choosing the partnership's name, it is a good idea to make sure that no other company is using a similar business name so as to not violate any federal trade name laws. You can check with your Secretary of State to see which names are already in use. Many states also require that you register any fictitious business name you use, called a "DBA" (doing business as). Check your state's Secretary of State website for more information.
When adding the effective date, you can choose any date that you want the partnership agreement to go into effect. In answering the business purpose, it is best to leave your purpose broad, so as to not limit your operations in the future. However, remember that you can always amend your general partnership agreement in the future if need be. Lastly, use the address of the partnership's primary place of business. If one has not yet been established, you can use the address of one of the partners.
The total initial capital is how much money the partners are investing in the partnership to begin operations. Simply indicate how much capital each partner is investing initially. Partners may always add additional capital at a later time. The contribution deadline is the date by which each partner must deposit his or her initial capital contribution.
When entering each partner's ownership percentage in the partnership, be sure that all percentages add up to 100%. For instance, if there are three partners and each will own an equal share of the partnership, then you would enter 33.3% for each.
Next, you will specify how the partners will divide profits and losses of the partnership. These are the net profits and net losses the partnership either earns or suffers during each accounting cycle. You may then specify how often any net profits that remain will be distributed to the partners. The partners will always have the option of retaining earnings to reinvest them in the partnership. This is usually a good idea during the initial stages of the business to keep it growing.
Here you will indicate how the partners will make important decisions. How decisions are made is completely at your discretion and usually depends on the number of partners and the type of business, among other factors. Keep in mind that it is often advisable to try to avoid any possibility of a tied vote between the partners, which often arises if there is an even number of partners and a majority vote is required to pass any decision.
You will then specify whether each partner has the authority to write checks drawing on a joint partnership bank account in the name of the partnership.
Next, you have the option of indicating how many vacation days each partner is allowed to take each year. This may not be necessary if the partners are not working full time.
In answering whether you will use cash or accrual accounting, "cash accounting" records revenue when money is received and expenses when money is paid, and "accrual accounting" records revenue when it is earned and expenses when they become due. Most companies use accrual accounting unless they are very small.
The governing law is the law that will control the partnership and settle any disputes between the partners. Usually, partners choose the state of their headquarters, but this is not required. It is also recommended that you select to include an arbitration agreement. This will help you avoid the time and expense of settling disputes between the partners in a formal court of law.
After completing the steps, print out the agreement and have all the partners and their spouses (or domestic partners) sign it in front of a notary public.
Spouses are required to sign it because the agreement requires that all spouses give up their right to inherit the ownership interest of any partner that leaves the partnership. Instead, the partnership will have the right to buy out any departing partner's ownership interest. This helps avoid the messy scenario that can occur if a partner dies and his or her spouse is forced to become a partner and have a hand in managing the partnership.
Once the document is signed by all the parties involved, simply distribute copies to all the partners.
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