Partnerships remain one of the most straightforward and easiest business structures available to partners who want to own property together or work together to make their business a success. Partnerships require minimal paperwork and bureaucracy, and they rarely require public filings. Still, formation is an important step for partnerships, just like it would be for any business. This cannot be done without a well-drafted partnership agreement. If you are looking to start your own partnership, we can help you draft the best possible partnership agreement for your needs. We can help you decide whether a limited liability partnership, a limited partnership, or a general partnership is right for your needs and help you draft the necessary documentation quickly.
When you start a business as a partnership, a partnership agreement governs its operations. A partnership agreement is simply a legal document that that establishes the terms of the partnership, as well as the roles and responsibilities of the partners. Partnership agreements serve as the governing documents of any partnership and they establish the rights and responsibilities of each partner, as well as the rules on how the business should be run on a daily basis or in the event of a business crisis, such as the death of a partner or dissolution of the partnership.
TYPES OF AGREEMENTS. While most partnership agreements will be fairly similar and should require the same types of clauses and provisions, there will be some variation depending on the type of partnership. There are three basic types of partnerships available to small businesses in most states in the U.S.:
(1) General Partnership. General partnerships make up the majority of partnerships in the U.S., as they are the simplest type of partnership available. In general partnerships, each partner is involved in the day-to-day management of the business and shares in the unlimited liability agreed to under this structure.
(2) Limited Partnership. Like a general partnership, general partners in limited partnerships run the business and take on unlimited liability. Unlike general partnerships, however, limited partnerships can have “silent” limited partners who are not involved in the operations of the business and have liability limited to the amount of their investment.
(3) Limited Liability Partnership (LLP). Limited liability partnerships are only available in some states, and most states restrict these types of partnerships to certain types of undertakings. LLPs operate like general partnerships, but all partners have limited liability.
Each type of partnership has its own advantages and disadvantages, and every partnership agreement will have very different needs, so it will help to discuss your options with a lawyer.
THE UNIFORM PARTNERSHIP ACT. Not all partnerships operate under partnership agreements. Some simply operate under a verbal agreement. These partnerships are governed by state law and the Uniform Partnership Act (in Washington, it's RCW Chap. 25.05; in Idaho it's I.C. Chap. 30-23). The Uniform Partnership Act defines defaults applied by the states to operations and disputes involving partnerships. While strictly speaking there is nothing wrong with operating according to the Uniform Partnership Act alone, conducting business without the protection of a partnership agreement often leads to unexpected, even costly, outcomes for businesses. It is always best to ensure that you have full control over how your business operates by using a partnership agreement.
KEY PROVISIONS TO INCLUDE IN PARTNERSHIP AGREEMENTS. Although every partnership agreement will differ slightly, all partnership agreements must address certain issues through the following key terms and provisions.
(1) Name. Any partnership agreement must name the business and in some cases must be accompanied by a request to file a “Doing Business As” or fictitious name.
(2) Ownership Percentages. All ownership allocation must be clearly defined.
(3) Capital Contributions. It is important to not only establish what contributions are expected of each party when starting the business, but also who will be obligated to contribute further capital at later stages and under which circumstances.
(4) Profit and Loss Allocations. While most profits and losses are allocated according to ownership percentage, this is not always true, especially if one partner does more in terms of management and is not given a salary. All profits and losses must be clearly attributed.
(5) Distributions. These provisions clearly establish when profits of the business can be distributed to the partners, and which partners, if any, earn a salary.
(6) Partner Authority. Unless otherwise stipulated, all partners have equal and unlimited authority to commit the business as they see fit. This power can be limited in this clause or require joint authority for large decisions.
(7) Management. This section generally assigns major management duties of the partners, especially vital procedures such as accounting.
(8) New Partners. This clause details the procedure to add new partners.
(9) Death/ Disability. This clause defines what happens to the partnership after a partner dies or is incapacitated, and, in the case that the partnership continues to exist, defines the authority of the beneficiaries of the partner who left.
(10) Dissolution. This clause defines situations under which the business will be dissolved, as well as exit strategies for any single partner who wishes to leave.
(11) Dispute Resolution. Even the best partnerships sometimes experience disputes. This clause explains the procedures for resolving such conflicts.
If you are considering forming a partnership, either to own property or to start a business with someone else, give us a call at 253.858.5434 to find out how we can help. We represent clients throughout Washington and Idaho and are available to meet in person (with appropriate social distancing protocols in place), by phone, or via video conferencing equipment.