Partnership Agreements: The Essentials


As with corporations, when two or more people form a partnership or limited liability company, it is imperative that they enter into a partnership agreement, setting forth some very essential elements of their relationship.  Doing so will go a long way toward avoiding confrontations down the road.

One important item to include in a partnership agreement is the expectation of the time and effort expected to be contributed by each partner.  It is also extremely helpful to include a description of the duties each person will undertake and be responsible for. For example, it could be stated that each partner is expected to contribute 30 hours each week to the affairs of the partnership and is prohibited from engaging in other work activities outside the partnership.  This is a way of ensuring that all participants are putting in the time and effort which is commensurate with the other members.

Also important is providing for the situation where a partner becomes disabled or passes away. Should a disabled partner receive his/her draw or salary for a certain period of time, based on the fact that he/she has contributed to the partnership in the past and may have only a temporary disability?  If a partner should pass away and there is no provision in the agreement as to what happens to that partner’s interest in the partnership, the other members will very likely see that partner’s family members and/or heirs take over the interest of the deceased partner.  No one wants to see a partner’s spouse and/or children step into the shoes of the deceased.  This is usually prevented by having a provision in the partnership agreement which states that the partnership or other partners are obligated to purchase the deceased’s interest, and that the estate of the deceased is obligated to sell.  One usually provides a mechanism in the agreement for the price and payment terms, and the agreement is often funded with life insurance.

Partnership agreements should also deal with the situation where a partner is not contributing his or her time and labor to the partnership, is found guilty of a crime, commits fraud, or some other serious infraction, or is found to be competing with the business.

Putting everyone’s expectations in writing can go a long way toward avoiding misunderstandings and disputes in the future.


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