An Introduction to Partnership Agreements

An Introduction to Partnership Agreements

With this post and a series of post that will follow, we will be talking all about partnership agreements. What are they? Why are they important? What needs to be included?

Before we get started, I’d like to make it clear what partnership agreements are and how they differ from other types of agreements.

When I say partnership agreements in the context of these blog posts, it refers to the agreement between two or more people who are going to be operating the business, and it is independent from the structure of the business. Strictly speaking, the agreement is between the members/owners of a business.

Other types of agreements that are at the core of any business are Operating Agreements, and Shareholders Agreements:

  • A Partnership Agreement, strictly speaking is for general partnerships, limited liability partnerships, and limited partnerships. These are the three common forms of partnerships, each with its own quirks.
  • An Operating Agreement is a type of partnership agreement that is unique to Limited Liability Companies (LLC’s). LLC’s are governed by their Operating Agreement so that there is a mechanism for managing the business between its members.
  • A Shareholders Agreement is often used for small corporations that are owned by just a small number of shareholders. They have many of the same features that we are going to be discussing, but it refers to the ownership of the stock shares. Shareholders agreements are common in start-ups.

For the purposes of this post I will be referring to a partnership agreement to refer to all three kinds of agreements. In the future there will be individual posts that are specific to LLC’s or Shareholders, but we will get to those later.

A partnership agreement is best thought of as the constitution of a partnership. It is the document that lays out the large scale operational matters from a strategic or ownership standpoint. It is not designed to govern the day-to-day actions between partners nor the decision-making about the business. It is designed to provide a large scale plan for operating the business. I am a big believer in partnership agreements because it is better to have a mechanism that you think of at the beginning of the relationship. If you don’t have this agreement, you will be trying to deal with events and circumstances on the fly, rather than thoughtfully implementing a management scenario to resolve a dispute or crisis. 

For the most part, partnership agreements can take whatever form the partners themselves want to have. It is a set of private laws and a private constitution of how the business is going to operate.

Before entering into any partnership agreement you should consult with an attorney. All partners should have their own attorney advising them on the partnership agreement. The partnership or company may retain an attorney to draft the document, but that attorney is often representing either one of the partners or the company itself. You should take care to see how that affects the balance of your operations and to avoid conflicts of interest.

If you need to consult an attorney regarding your partnership agreement, feel free to contact us at anytime.