15 Sep What Are the Governing Documents for General Partnerships?
By: Barry E. Haimo, Esq.
September 14, 2016
What Are the Governing Documents for General Partnerships?
If you decide to enter into a general partnership, it can be made official in a matter of seconds. Partnerships are simple agreements and 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.
However, a gesture and an oral agreement do not always cut it when you are making big decisions or determining liability down the road. Contracts and governing documents are often drawn up to clarify each partner’s role and how their ownership affects their position in the partnership.
So what governing documents should you have for a general partnership? “Partnership agreements” run general partnerships.
How Agreements for General Partnerships Work
Partnership agreements are essentially a contract drawn up by all of the partners that is 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. To give you an idea of how partnership agreements are usually drawn up, 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 (which 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, and this should be laid out in the partnership agreement. For example, if 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 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.
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 will often be reflected in changes to the economic and tax situation for different partners.
Also, all partners involved in the agreement must approve most changes. (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.)
Bottom line? Keep your attorney’s number on hand while you and the other partners write a partnership agreement, or simply 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.
Barry E. Haimo, Esq.