General partnership Agreement
Definition of a General Partnership Agreement
A general partnership agreement is a business entity where two or more persons agree to share in assets, profits and liabilities. In a partnership agreement set-up, the partners agree to unlimited liability hence the liabilities are not capped. Further, the liabilities can be paid through the seizure of another person’s assets. Any of the partners in a general partnership agreement may also be sued for the partnership’s business.
Additionally, in a general partnership agreement, each of eth partners is responsible for their tax liabilities. This includes their partnership earnings. The tax liabilities in a general partnership agreement are also taxed on the income tax returns and do not flow through the partnership.
Understanding General Partnership Agreements
General partnership agreements offer partners flexibility to structure their business as they deem fit. This grants the partners power to control the operations of the partnership at a close ranger. It also permits decisive and swift management compared to companies. The management of companies involves several bureaucracy procedures thus complicating the operations of an entity.
A general partnership agreement must create an entity that satisfies several conditions including:
- A partnership containing a minimum of two people.
- All partners ought to agree to all the liabilities that the partnership incurs.
- The partnership ought to be memorialized in an official written general partnership agreement. However, an oral general partnership agreement is valid though hard to enforce.
- Partners should assume unlimited liability hence their personal assets could be seized if the partnership became insolvent.
- The partners should create a written partnership agreement.
- General partnerships are cheaper compared to corporations.
Importance of a General Partnership Agreement
A general partnership agreement is a key agreement since it outlines the genera aspects on the running of the partnership. It is also essential for dictating the ownership interest and role of each partner. Further, a general partnership agreement outlines the partners’ initial contribution and the procedures for selling an ownership interest. It also identifies situations that lead to the dissolution of partnerships.
Additionally, it is important that all partners agree on the terms and conditions of a partnership agreement. This will aid in preventing any disputes from occurring later. Partnerships that fail to form a general partnership agreement often collapse a few years into the business.
General Partnership Agreement Features
A general partnership agreement provides that every partner has the right to solely transact. Hence a partner is allowed to enter into biding contracts, agreements and other business deals. In such situations, the rest of eth partners are bound to abide by the terms. Such may lead to conflicts and disagreements. Partners try to mitigate this by including conflict resolution mechanisms into their partnership agreements.
In some instances, partners only agree to proceed with significant decisions if there is a complete census or the majority vote so. In other instances, the partners designate non-partner appointees to manage the partnerships. This is similar to a corporation’s board of directors. More significantly, a broad general partnership agreement is key the unlimited liability of partners puts the affairs f innocent parties at risk. This especially applies in instances where the partners are involved in illegal activities.
General partnerships dissolve when a partner dies, becomes disabled or leaves the partnership. The general partnership agreement may include provisions guiding the entity on the way forward in such situations. For instance, the agreement may outline that the deceased partner’s profits and interests transfer to the succeeding partners.
Important Information to Include in the Agreement
The first step in forming a general partnership agreement is agreeing on the name of the partnership. Other aspects to be included in the agreement are the partnership’s purpose and address. When selecting the partnership’s name, it is good practice for partners to ensure that no similar entity is running under a similar name. Otherwise, the partners could be in violation of domestic laws that govern trade names.
Additionally, partners are free to choose the date in which they want the general partnership agreement to be in effect. The purpose should be broad to avoid limiting future operations. For instance, the partners may state that the purpose is manufacturing and selling metal products and related goods.
The general partnership agreement automatically states that the purpose is to conduct any egal transactions that further the business purpose. Further, that the purpose includes any other business that partners may agree on from time to time. However, the partners can always amend the agreement.
The final section is the address of the partnership hence its primary place of business. In case the partners have not established a location, they can use the address of one of the partners.
Key Aspects in a General Partnership Agreement
1. Partner Information
Here, the involved parties select the number of partners and enter their full legal names. The majority of the nations allow up to six partners.
2. Initial Capital Contribution
The total initial capital contribution means the amount of money the partners are willing to invest in the partnership to star operations. The contribution deadline is the date on which each partner deposits their initial capital contribution. The partnership agreement could provide for allowance to invest additional capital.
3. Ownership
Each partner’s ownership percentage must be included in the partnership agreement. For example, if there are three partners and each has an equal share of the partnership, then 33.3% each is enough. One can also customize each partner’s share according to their will.
4. Profits and Losses
A general partnership agreement must outline how partners will share the partnership’s profits and losses. These include the net profits and losses that the entity earns or suffers in its operation. One can specify how often the net profits will be distributed among the partners. Also, the partners will always have the option of retaining earnings and reinvest them in the partnership. This is effective in the initial stages of the business.
5. Decision-making and Management Function
A general partnership agreement should also outline how the partners will make key decisions. The manner of decision-making is at the discretion of the partners. It also depends on the number of partner and industry type. The significance of outlining such roles is avoiding tied votes. This happens where there is an even number of partners and the majority vote is needed to pass a decision.
Where there is an even number of partners, a tied vote could be avoided by choosing an external and independent advisor. The role of the advisor is to advise the partnership and serve as a tiebreaker. Alternatively, a partner holding a majority of the ownership interest could be asked to pass any vote. This aids in avoiding a tie as long as the ownership interests are not allotted in a 50/50 split ownership.
6. Partnership Checks and Vacation Days
A general partnership agreement should clarify whether every partner has the authority to write cheques. The cheques are based on the joint partnership bank account in the name of the partnership.
Partners also have the option of including the number of vacation days every partner is permitted to take every year. However, this may not be necessary if the partners do not work full time.
7. Accounting
Partners should also make it clear in the general partnership agreement whether they will use cash or accrual accounting. Therefore, they should know the difference between the two:
- Cash accounting revenue records income and expenditure.
- Accrual accounting records revenue and expenses wen they fall due. The majority of the companies use accrual accounting unless their operation does not allow.
- Governing Law
A general partnership agreement ought to include the governing law clause. This section includes the laws and regulations that will govern the partnership’s operations. The laws will also apply to any disputes that arise. Often, partners select their headquarters’ state but it is not mandatory. It is also recommended that one includes an arbitration agreement. It helps in avoiding unnecessary expenses and time when setting disputes between partners.
8. Executing the Agreement
After completing the above-explained step, the partners should print out the general partnership agreement. All partners and spouses and domestic partners should also execute the agreement. The entire process should be witnessed by a notary public. Upon all partners signing the document, the copies should be distributed to all the partners. This marks the end of the partnership agreement.
Benefits of General Partnership Agreements
Partnership agreements are less expensive to negotiate. Hence establishing a general partnership is cheaper than a limited liability partnership or limited liability company. Registering general partnership agreements is also easier and formulating them requires less paper work. Some nations do not require filing any documents except permits, licenses and registration forms at the local level.
References
https://www.business-in-a-box.com/pertnerships
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