There is no law that requires a partnership to draw up a written contract. The mutual agreement, between two or more people, to run a business together is really all it takes to form a partnership. It's possible that a very simple, straight-forward business with little financial investment may be successfully run without a written contract, but the more complicated your business, the more important it is to get it in writing.
Many a successful business partnership has been formed based on nothing more than a common goal and a firm handshake. Each partner agrees to put in a certain amount of cash and agrees to take on certain responsibilities. They manage to run their business together without any problems, each partner is happy with their arrangement, and they never feel a need to put it all in writing.
Partnerships have also been formed without a written contract, with each partner believing that they've covered all the details. They may eventually learn that they have some confusion about each of their responsibilities, or how the business is to be run, and begin to have problems. They may have been long-time friends, but their personal relationship may become strained due to their business relationship. In hind-sight, they may eventually see where a written contract could have helped them avoid these problems.
Those who decide not to write a partnership agreement tend to assume that they don't need one because they know each other well, and trust each other. But, it's not about whether you trust your partner; you shouldn't even consider running a business with someone you don't trust. It's about each partner coming into a business agreement with a clear understanding of what the other expects of them, as well as how they will handle different situations, should they arise in the future. Some may believe their business is so simple that they don't need a contract, and at times, that may be true, but it's normally safer for everyone involved if each partner knows how they will handle issues before they become a problem.
There's something about the written word that makes it seem more real than a simple verbal agreement. And while a verbal agreement is just as binding as a written contract if you have to get the courts involved, it's just easier to prove your agreement when you have it all in writing. You can eliminate conflicts that may come up due to one of the partners "forgetting" about specific details of your arrangement.
Your contract should include:
- the name of each partner, the name of the partnership, and the date the partnership was formed.
- the address of the partnership's primary office.
- the purpose and nature of the partnership. This is typically pretty straight-forward, but it is still important to include so that no partner will stray from the original intention of the formation of the partnership.
- the amount of capital contribution that each partner will put into the business, including cash, property, or services.
- how profit and loss will be allocated. Most partnerships share 50/50, but it is especially important to specify this if you will split differently.
- how labor hours will be divvied up, and how much vacation time each partner can expect.
- the authority and responsibilities of each partner. Specify the general duties of each partner, and which partner will make the different types of decisions. This will help each partner know what is expected of them, as well as to ensure that no aspect of running the business is overlooked in your planning.
- how you will admit new partners if you someday expand your business. Specify how the decision will be made, whether by a majority vote or unanimous agreement.
- what happens if one of the partners dies. Often, partnerships are dissolved upon the death of a partner, but you may choose to allow an heir to step into the place of the deceased partner.
- how you will handle the exit of one of the partners. Specify how the remaining partners will buy out the partner who's leaving, and whether it will be done as a lump sum or spread out as payments over so many years.
- whether you'll need signatures of all partners for checks, or if only the signature of one partner is needed.
- how conflicts will be resolved if the partners cannot come to an agreement on their own. Court action is not the only way to settle a dispute; you may consider mediation or binding arbitration as an alternative.
- any other issues that you and your partner feel are pertinent to your partnership.
Despite the partners' effort to write up a thorough partnership agreement, sometimes they find that they've missed an important detail. They may not have anticipated an issue, and didn't put it into their contract. They may be dead-locked, and mediation and arbitration are of no help. The court system may be the only way to resolve the problem.
The UPA was first proposed, in 1914, by the National Conference of Commissioners on Uniform State Laws (NCCUSL) for the governance of business partnership in the U.S. Updated versions has been introduced, the most recent in 1997, and these are sometimes referred to as the Revised Uniform Partnership Act (RUPA). All states, except Louisiana, have adopted either UPA or RUPA to deal with partner conflict issues that are not covered in the partnership agreement.
Some states have not adopted the latest version of the UPA, and some have modified UPA or RUPA guidelines; check with your state to see which version they apply. You may use these guidelines when you draft your own partnership contract, but you have the right to modify any of the guidelines to suit the needs of you and your partner.
A good partnership starts with a good agreement.
Once you have come to an agreement on how you will run your partnership, and put it into a written contract, you and your partner can go on to run your business with confidence. You'll each go into the partnership knowing what to expect, and knowing what your partner expects out of you. A clear understanding will help you avoid many of the problems that partnerships may suffer from.
Sources:
allbusiness.com
wikipedia.com