What is a Partnership Agreement and Why it is important?

A partnership agreement is an agreement as the name suggests, between partners of a company. The agreement is formulated when the company is formed, primarily, to ensure that partners of a company share a common understanding from each other and from the company. Ensuring that partners have an agreement can reduce disagreements later on and will ensure the smooth functioning of the role of partners. The purpose of a written agreement is to protect investments of the partners, ensure that issues related to governing and control are mentioned in the agreement, define the obligations and rights of partners. A written partnership agreement will reduce the risk of disagreements, misunderstanding, and disputes between partners of a company.

There are several benefits of having a partnership agreement. Firstly, without an agreement, the company will have to resort to the default rules of the state. A written agreement allows for partners to have more control of their company and allows them to dictate the rules which would reflect the best interests of the company. Secondly, a partnership agreement includes information on sales and transfer of interests. The written agreement is particularly important, as without it an owner can sell their interests to anyone, including a competitor. The agreement further discusses measures such as- the death of an owner and makes provisions for all types of scenarios. The agreement describes in detail if written well who the interests of a company can be sold to or transferred to, to avoid any uncertainty.

Thirdly, a partnership agreement will ensure that partners agree on important issues well in advance such as dispute resolution. It is important for partners to address how to handle disputes if they arise and a dispute resolution clause in the agreement can be helpful in the long run. Dispute resolution such as mediation and binding arbitration in writing can be beneficial to partners and the company if a dispute arises, which would avoid costly and time-consuming litigation. The agreement should also contain a provision if a nonperforming or disruptive partner wants to leave the company and join a competitor's company. The agreement also protects the business, the partner's investment, the minority, and the majority owners. Fourthly, a partnership can also protect partners who want to share profits without becoming involved in legal issues such as lawsuits.

Attorney Shawn McBride explains that “Partnership agreements are critical to good business operations when there is more than one owner. They act to set expectations and deal with what happens when things happen in the future. For instance, a good partnership agreement will say what happens in the event of a death, disability, divorce or disagreement”. Partnership agreements also include restrictive covenants such as a non-compete, a non-disclosure, and a non-solicit. The agreement also includes percentage of ownership, division of profit and loss, length of the partnership, and partner authority.

Article Submitted by Sanya Sharma