What Are the Governing Documents for General Partnerships?
By: Barry E. Haimo, Esq.
February 21, 2022
General partnerships can be made official in a matter of seconds. Partnerships are simple agreements. They can technically be formed with a handshake. In fact, the law generally says that two people or entities working together to earn a profit are considered a partnership. That’s frighteningly easy.
But a gesture and an oral agreement do not always cut it when you are making big decisions or determining liability. General partnership documents are often drawn up in good business planning. They clarify each partner’s role and how their ownership affects their position in the partnership.
So what do you need to know about general partnership documents? Let’s take a look at partnership agreements.
How Agreements for General Partnerships Work
Partnership agreements are essentially a contract drawn up by all of the partners. They are used as a resource and a binding agreement when disputes or disagreements in operations arise.
As with any governing document, these documents should be written with the specific partnership or business in mind.
Here are a few elements that are commonly found in partnership agreements:
Ownership: The amount of ownership each partner has in the partnership is crucial to determining each partner’s influence, role, and voting rights when making important decisions. The partnership agreement should give a brief outline of each partner’s percentage of ownership. This can and should be adjusted as ownership changes over time.
Allocation of Profits and Losses: In many partnerships, this is determined by ownership. However, some partnerships handle the allocation of profits and losses differently. This should be laid out in the partnership agreement. For example, one partner contributes money and the other contributes services. Generally the “money partner” will receive a greater allocation of profits and losses until repaid plus a percentage interest before returning to pro rata.
Binding Rules: Depending on the size and status of your partnership, each partner may want to be aware or give consent before any obligations or binding agreements are made. This process should be laid out in the partnership agreements. This can help to avoid any deals that would upset or blindside other partners.
Voting and the Decision Making Process: Again, these processes are usually determined by ownership: partners with a higher percentage of ownership usually have more influence or more votes when coming to a decision. This part of the partnership agreements should not only lay out who makes big decisions, but also how those decisions are made. This allows the business to move in a timely fashion and continue to progress. Sometimes the partners can negotiate a greater degree of control than would otherwise be represented by number of shares.
Conflicts and Exiting Partnership Agreements
Disputes: If a decision cannot be made or a disagreement arises between two or more partners, a partnership agreement serves as a good guide for coming to an agreement and resolving the dispute.
Exiting the Partnership: General partnerships do not last forever. If a partner wants to exit the partnership (or if a partner suddenly dies or becomes mentally incapacitated/ passes away), the partnership agreement should lay out the procedures for removing the partner and allocating their duties, responsibilities, and so on to the other partners.
Adjustments to Partnership Agreements
If adjustments or changes need to be made to a partnership agreement, they should be done in a timely manner. These changes can shift the economic and tax situation for different partners.
Also, all partners involved in the agreement must approve most changes to general partnership documents. You can, however, add a clause in the partnership agreement that will determine how these changes can be made and who must be present for the changes to become official.
The Bottom Line in Partnership Agreements
Keep your attorney’s number on hand while you and the other partners write a partnership agreement. Or better yet, have your attorney draft the document. He or she can advise you on what should be included in a partnership agreement and how different decisions may affect you and your income down the road.
Originally published 09/15/2016. Updated 02/21/2022
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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