When you decide to start a business with partners, you'll want to create a General Partnership Agreement.
Without this contract in place, you'll have ambiguity around partner roles and responsibilities, contributed capital amounts and equity positions, rights to profit distribution, and how to handle scenarios like an acquisition of your company or when a partner dies, gets divorced or decides to leave the business.
What's Covered in a General Partnership Agreement
Important information that is contained in a General Partnership Agreement includes:
- The name of the partnership business
- The address of the partnership business
- The type of business and its purpose
- The effective date of the agreement
- The list of partners
- The initial capital contributions coming from each partner, their ownership percentage and the date by which capital contributions must be received
- Terms and conditions for partners making additional capital contributions in the future
- Instructions for handling profits and losses from the venture, which might involve profits distribution or retaining earnings to fund future growth
- Accounting and finance instructions covering things like the accounting method (accrual vs. cash basis), tax payments, tax-related distributions and tax filings
- Guidelines and assignments for management roles and decision-making processes
- Assignments and restrictions with respect to things like bank account access, expenses and check-writing privileges
- Agreements between the parties on how to handle scenarios such as the death of a partner, the acquisition of the business or the decision to bring on a new partner
- Instructions as to how the agreement can be amended, if necessary in the future
- Any agreements around dispute resolution, such as who pays attorney expenses and whether an arbitrator must be used
- The governing law (i.e. which location) that will be used for any legal matters that arise from the General Partnership Agreement
The General Partnership Agreement may contain other clauses, but the items above are almost always included in every General Partnership Agreement.
Whether to Use Inexpensive or Free Online Templates for a General Partnership Agreement
We're often asked whether you can get away with using a free online template for a general partnership agreement or one of the inexpensive online contract templates that you can find quickly with a quick Google search.
The short answer is yes.
The caveat is that you should only do it if you feel comfortable reading and modifying legal documents, and if your circumstances make using a General Partnership Agreement contract template appropriate.
For example, if you have a low-stakes partnership (e.g. you're not planning on an IPO in a few years), you can get away with keeping your costs down when preparing a General Partnership Agreement.
You also have the option of starting with a free or inexpensive contract template and then hiring an attorney a few years out to re-draft the agreement. By then, you'll hopefully have enough positive cash flow that you won't mind the extra lawyer expenses.
If you don't feel comfortable creating your General Partnership Agreement on your own, or if you are just flush with cash and don't need to scrimp, you'll want to hire an attorney. By having all of the items we've mentioned above, you can keep the lawyering costs down. You can even go with a hybrid option in which you start with a template, fill it in to the best of your ability and then have an attorney redline it to final.
Executing a General Partnership Agreement
Prior to signing, it's a good idea for each partner to have their own attorneys review the General Partnership Agreement.
What you want to avoid is the mistake of every partner relying on one attorney. Most attorneys will avoid this conflict of interest, but you never know.
You'll also want to include a clause that says that each partner has consulted with legal counsel or has intentionally and will fully waived that right, prior to signing.
When it comes time to sign, you should have the document signed in front of a notary. This avoids a worst-case scenario where somebody says they didn't really sign their paperwork. (Believe it or not, that happens.)
Finally, be aware that many General Partnership Agreements will require the spouse or partner to sign the agreement, acknowledging that they understand the terms as well. Again, this avoids a worst-case scenario in which a Partner's divorced spouse makes claims on the business. As with all things in law, the adage "Better safe than sorry" applies.
Once your General Partnership contract has been executed, make sure each partner gets a copied and store physical and electronic documents in a safe place for future reference.