Partnership Agreement Basics

Partnerships are a common business structure in the US because they do not require a formal agreement; rather, partnerships begin when two or more persons engage in a business enterprise for profit. Many partnerships start in this manner before drafting a clear partnership agreement to govern the enterprise. At PALUMBO LAW, we have helped hundreds of existing partnerships and enterprising individuals in drafting partnership agreements, ensuring protection for all parties. Although partnership agreements can be complex and lengthy, the most important questions that they answer are:

Who owns what?

Partnership agreements must identify each partners’ financial contribution to the partnership. Financial contributions can take the form of cash or assets. In the case of assets, such as real estate or equipment, the partners much agree to the contributions of financial value. 

How are profits and losses divided?

Partnerships are flow-through entities for tax purposes, meaning that partnerships’ profits and losses flow through to the individual partners and are taxed at the partner level. The default profit and loss allocation are consistent with the ownership split. However, partners can amend this to give partners more or less of the profits and losses than their economic interest. 

Who has the authority and how are decisions made?

The ability of each partner to act on behalf of the partnership, such as binding the partnership to contracts or taking on debt, should be clearly defined in the partnership agreement. In many cases, important decisions may require multiple partners to consent. This protects the partnership from one partner unilaterally affecting the partnership’s ability to continue trading. Ultimately, authority and the decision-making process should be clearly defined within the partnership agreement – doing so helps to reduce disputes in the future over individual partner action.

What happens when one partner dies, becomes incapacitated, or wants to leave the partnership?

The partnership agreement should clearly identify the rules for handling the death or incapacitation of a partner. This is a topic that is often not considered and can have disastrous consequences if not clearly addressed. Similarly, although partners often believe they’ll always get on and remain friendly, many partnerships do not work out and result in one or more partners exiting the business. How that partner exits the business should be clearly defined.

How are disputes resolved?

If the partners cannot come to a clear agreement, such as a two-partner partnership with 50/50 voting power, how do they break the deadlock? Many partnership agreements include a mediation clause or a mechanism for a third-party to aid in resolving the deadlock. Failure to address dispute resolution can leave the partnership in a state of limbo as major decisions remain unresolved. 

Business and Partnership Lawyers in Rhode Island, Massachusetts, and Connecticut

At PALUMBO LAW, we have represented thousands of businesses and real estate investors in choosing the appropriate business entity, drafting business documents and legally forming the business, acquiring other businesses in whole or in part, divesting parts of the business, and winding down the business. If you have questions relating to a business in Rhode Island, Massachusetts, or Connecticut, please contact our office to set up a consultation or complete the contact form