General Partnership Agreement Terms

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A general partnership is a flexible form of business entity, however, as discussed in my blog post about general partnerships, it does not afford much protection from liabilities.  In order to make the best of your general partnership, if that’s the business entity that you are forming, you should have a written general partnership agreement.  This agreement should memorialize, in detail, various terms of your agreement, to include:

Percentage Interest of Each Partner

General partnerships are simply managed by each of the partners.  In general partnerships, the written general partnership agreement will spell out the percentage interest of each partner.  Important decisions are generally made based on the vote of a majority of the partners’ percentage interest. In contrast to Corporations, which are usually managed by officers who are appointed or elected by the shareholders or representative managed.

You should note that a partner vote does not occur when making decisions in the day-to-day operations of the partnership, such as buying coffee and supplies, but a vote will be necessitated when the partners have a dispute that cannot be resolved on an informal basis.  When this occurs, the majority vote normally prevails.

How Business Decisions Are Made

Now that you have determined the voting interest of the partners, you should state the percentage of vote that represents an affirmative decision.  Do you need a simple majority, just over 50%, or do you prefer unanimous voting.  Unanimous, although it may work for some issues, is usually not the best choice because it can often cause loggerheads to exist for reasons that you had not intended.  So, try to pick a percentage other than 100% unless there is an issue that is important enough that you want all the partners to unanimously consent before proceeding.  Further, sometimes in a partnership with a division of the voting rights such that one or more partners rights equal exactly 50%, you will need to determine how the tie will be broken.

How Any Disputes are Handled

Your general partnership agreement should document how to handle any disputes that arise and how you would like to deal with them.  You will need a provision in your partnership agreement that dictates the procedure for stepping through a dispute between partners, this could be the same as the decision making percentages, above, or it could be completely different.  It does not really matter if it is the same or not, what really matters is that spelled out in your general partnership agreement are the steps to be taken to resolve disputes.

What Happens When a Partner Wants Out

Well, that’s a good question,  the answer I usually hear is, “No one will leave the partnership.”  Then I am put in the position of explaining that this general partnership agreement is like a prenuptial agreement, no one ever believes we are going to use it, however in the unlikely event of a water landing…wait, that’s not right…of a partner wanting to extricate him or herself from the partnership, we will all know what to do.  In this provision you should cover not only the process, who should be notified and how, but also how to value to partnership and either a specific professional to be named to value the partnership or someone in a specific field, be it a CPA an appraiser, etc.  Also, it should be spelled out when the departing partner will be paid, upon completion of the other events spelled out, at quarter end, at year end, or some other time.

Meeting Frequency

Unlike the rigid requirements of corporations, regular and formal meetings are not required by partnerships. That said, general partnerships often elect to hold periodic meetings. If your partnership elects to have standardized, periodic meetings, you need to spell that out with specificity in your general partnership agreement.

The above-discussed terms are a good start of what you will need to hammer out and specifically address in your written  general partnership agreement.  Partnerships can be formed orally. Of course, a partnership based on a handshake often leaves many terms unspecified causing misunderstandings to escalate into litigation situations.  So, you should always form a partnership in writing and specifically spell out all the terms of your agreement. Preferably, you should prepare this general partnership agreement with the assistance of your small business lawyer. The cost for an attorney to draft your partnership agreement can vary greatly and will depend, among other things, on the intricacy of your partnership arrangement.

If you would like to discuss your general partnership agreement, contact Integrated General Counsel today to schedule your comprehensive Business Building Benchmark.  This Benchmark will help us put your partnership agreement together and identify any liability issues you may be facing and what you need to do to fix them. Normally, we charge $1250 for this Benchmarking session, but if you mention this blog post and we still have room on our calendar this month, we will waive that fee.