Many partnerships are formed naturally because persons involved in the business or company share the same objectives and don’t need partnership formation documents to exist. However, drafting a partnership agreement before the company is formed is vital.
The document outlines the goals, how the business will operate, the responsibilities of each partner, how much stake each partner owns, and how they should share the profits/losses. Most importantly, it should outline how disagreements should be resolved and the exit strategy. Keep reading to learn more about partnership agreements and what happens if partners don’t have them.
Benefits of a Partnership Agreement
Partners should write a partnership agreement, the governing document for the partnership. Without this essential document, the default state government rules will manage the partnership. If that happens, some partners can feel aggrieved as some default state rules can be unfair to them regardless of their investments in the business, leading to conflicts and disagreements. Creating a partnership agreement at the start can help smoothly manage the business.
In addition, a partnership agreement outlines each partner’s rights, duties, and responsibilities, ensuring each member plays a vital role in the company’s growth. The document also outlines how they share profits and losses equally based on their investments. With a partnership agreement, partners can draw a salary from the business, while without it, they only share the profits and losses.
Most importantly, with a written partnership agreement, there is an exit/dissolution clause, minimizing the need to go to court when one needs to exit or when partners decide to dissolve the partnership. The partnership should also have details on resolving disagreements or disputes, eliminating the need for lawsuits, which can be costly and time-consuming.
What is the Best Time to Draft a Partnership Agreement?
Most people who come together to start a business to share profits rarely think of writing a partnership agreement. They mainly focus on putting the establishments and attracting customers. Creating a partnership agreement comes to mind when they start making profits or when disagreements emerge. And that can be too late.
To be on the safer side, you should create a partnership agreement before you start the business. The contract should have all your goals, how you intend to run the company, the responsibilities and duties of each partner, the investment of each partner, how to resolve disagreements/disputes, and what one does to exit the partnership. This will protect every partner’s interests in the partnership and ensure the smooth running of the business.
What Happens If There Is No Partnership Agreement?
Suppose there is no agreement, and a tricky situation arises, like a disagreement. In that case, if one party wants to exit or all parties wish to dissolve the partnership, the partnership will be governed by the default rules set forth by the state where the partnership is located. And This can lead to further conflicts and disagreements between partners. Therefore, creating a partnership agreement before starting the company or business is always advisable.
If you want to create a legally binding partnership agreement, Forms.legal covers you. We provide partnership agreement form templates for different states. All you need is to fill in the form, download and print it for signing.