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The DNA of Your Business: Partnership Agreements

By Daniel H. Stoner, Esq.

This article is the first of a three part series regarding business agreements. The topics covered in this series are Partnership Agreements, Operating Agreements and Corporate Bylaws. This Article deals with Partnership Agreements

Businesses are ultimately rooted in the law of contracts. This is especially true when are business is made up of one or more persons. When a business is made up of multiple persons, it is essentially a set of agreements amongst the partners, shareholders or members which make it up.

When these agreements are simply done on an oral basis, and there is no written agreement that exists, you are operating with the same level of risk that you would have with any contract which isn’t in writing. It is imperative that all businesses have the basic rules of their enterprise in writing, and this is magnified when you are operating a business with several other people.

The Partnership Agreement

Every Partnership should be accompanied by a Partnership Agreement. A Partnership is a type of business entity that takes the form of an association between two or more people (the “Partners”). A Partnership must encompass at least 2 people, and unlike an LLC or a corporation a Partnership cannot be owned just by one individual. The defining characteristic of a Partnership is the intent to share profits and expenses amongst the Partners.

There are 2 dominant kinds of Partnerships: General Partnerships and Limited Partnerships. A General Partnership is the classic kind of Partnership where all of the parties share equally in the costs and profits of the venture. All of the Partners can be personally liable for the debts and liabilities of the Partnership. A Limited Partnership involves the existence of two different kinds of partners: General Partners and Limited Partners. The General Partners have all of the rights and liabilities of a General Partnership, however there is also a second class of Limited Partners who unlike the General Partners are not subject to personal liability for the actions of the Partnership and generally take on a smaller share of the costs and profits.

A Partnership can exist without any kind of Partnership Agreement or registration with the state, these kinds of Partnerships are often called Partnerships by Estoppel and will be recognized by the Courts. However, one can organize a General Partnership in Pennsylvania with the Department of State by creating a Limited Liability Partnership. This is favorable to a Partnership by Estoppel in that the individual liability of the Partners will be more protected and such Partnerships tend to be stronger and more stable than Partnerships which are not organized through the state.

The Commonwealth of Pennsylvania also allows people to organize Limited Partnerships through the Department of State. Generally Limited Partnerships are harder to recognize at the common law and will not be recognized by the Courts unless a Limited Partnership has been organized or a clear Partnership agreement exists which proves that the venture is indeed a Limited Partnership.

A well written Partnership Agreement should clearly define the rights and duties of all of the Partners. Every topic from tax matters to what happens if one of the Partners falls ill or dies should be covered in the Partnership Agreement. The process of drafting a Partnership Agreement also gives you the chance to truly talk with your Partners about how they would like the business to operate and what their expectations are. Often times, when Partners start doing business without having these discussions they can create problems down the road if it turns out that the Partners have disagreements about the business which could have been found out in the drafting of the Agreement.

No matter what kind of Partnership you choose to create, having a Partnership Agreement is crucial. Partnerships which do not have the Agreement stated out in writing, or have very poorly written Partnership Agreements are far more likely to result in disputes which are litigated at Court. If you are creating a Partnership, the drafting of a Partnership Agreement should be one of your number 1 priorities. The right law firm should be able to draft a Partnership Agreement affordably and effectively. If you have any questions regarding Partnerships or Partnership Agreements you should contact an attorney to ensure that your business will be built to be healthy and successful.

THE INFORMATION ON THIS BLOG IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE LEGAL ADVICE. PLEASE CONTACT AN ATTORNEY LICENSED IN YOUR JURISDICTION BEFORE ACTING ON ANY OF THE INFORMATION CONTAINED IN THIS BLOG.