A partnership agreement is an essential contract to have when starting a small business. This type of agreement sets out the rules that will govern the rights and obligations of each partner involved in the business endeavor.
Setting those rules before conflicts arise can provide a strong sense of certainty and prevent costly litigation that could threaten to split the business apart.
The business and contract attorneys at the Katz Law Group have guided numerous business partners in Massachusetts through this important and sensitive step in their venture.
What is a Partnership?
A partnership is a business relationship that gets formed whenever more than one person agrees to undertake an ongoing business venture. They can involve dozens of parties getting together to run a business or as few as two. In many cases, they are informally created by a couple of friends who decide to turn a hobby into a money-making enterprise.
A partnership is different from a joint venture, which occurs when multiple parties pursue a single transaction or task.
3 Types of Partnerships in Massachusetts
Partnerships arrangements span a spectrum from informal to very structured, and include:
- General partnerships
- Limited partnerships
- Limited liability partnerships
General Partnerships
A general partnership is the most informal. It is created when multiple people agree to go into business together. Unlike the other types of partnerships, you do not have to file any paperwork or do anything formal to create a general partnership.
Limited Partnerships
Limited partnerships, or LPs, are formed when a general partnership files for an LP with the Massachusetts Secretary of State. It has general partners, who actively run the business, and limited partners, who are investors in the venture. Limited partners are insulated from personal liability for the partnership's activities.
Limited Liability Partnerships
Limited liability partnerships, or LLPs, are also formed by filing with the Secretary of State. Unlike LPs, though, all of the members of an LLP are insulated from liabilities incurred by the business partnership.
Effective Partnership Agreements Set Goals, Rights, and Obligations
Regardless of the type of partnership you want to create, it is extremely important for everyone on board to know what they are getting into, what rights they have within the organization, and what is expected of them.
That is where the partnership agreement comes in.
Each agreement should be unique and should address the needs and concerns of the partnership and every person involved in it. Just a few of the provisions within the partnership agreement should include:
- The name of the partnership, its date of formation, and who is in it
- Which state's laws the partnership is created under
- The term of the partnership, such as whether it will end on a particular day, continue in perpetuity, or close upon completing its objective
- How new partners can be added to the venture
- How existing partners can be expelled from the business
- How profits will be disbursed
- Which partner contributed assets to the venture, and how much
- How expenses incurred by the partnership will be paid
- Each partner's rights and obligations under the partnership venture
If these issues are not covered in the agreement, the Massachusetts partnership laws in M. G. L. c. 108A will step in. In many cases, however, the rules that this statute provides are contrary to the partnership's best interests. This is why having a binding partnership agreement is so important – even if you are forming a general partnership that does not legally require any formal documentation.
The Risks of Moving Forward Without a Partnership Agreement
There are two main risks of not having a written partnership agreement for your venture:
- The parties do not affirmatively agree to their rights and obligations, and
- The partnership adopts Massachusetts' rules for partnerships.
Both of these risks are related to one another.
While it is not a guarantee that either of these risks will manifest during your venture, if the partnership does not go smoothly then the lack of an agreement can make things much worse, very quickly.
The Parties Do Not Affirmatively Agree to the Rules
A big problem with not creating a partnership agreement for your venture is that the rules that will govern it will not be the result of a negotiation. This can lead to problems.
First, it will mean that the parties to the partnership will not know their rights or obligations without conducting significant legal research into state partnership law. This can cause needless confusion and support damaging claims by partners that the venture lacks transparency, hurting good will and morale and undermining faith in the business.
Second, without a partnership agreement, the partners will not have the opportunity to hammer out a contract that strives to serve their interests. Instead, they will be left to the whim of state partnership law, which aims to provide reasonable rules for most partnerships in the state, but often fails to do so.
Massachusetts State Partnership Rules Apply
The other, related problem with not adopting a partnership agreement is that Massachusetts state law acts as a “gap filler” for these contracts. Any situation that is not contemplated or resolved by the written partnership agreement will be governed by the appropriate section of M. G. L. c. 108A.
If there is no partnership agreement, then this statute will govern in its entirety.
M. G. L. c. 108A is largely based on the Uniform Partnership Act (UPA), which has been adopted in some variation by every state except Louisiana. While the goal of the UPA is to provide workable rules for business partnerships, the reality is that it is a series of compromises that only work in a generalized, hypothetical, and extremely basic business relationship. By not adopting a partnership agreement that addresses your particular needs and concerns, you fall back on state law that could very well run against your interests.
Massachusetts Partnership Lawyers at the Katz Law Group
If you are forming a business with other people, a partnership agreement is a good investment. It can create certainty about everyone's rights and obligations in the venture, which can avoid conflict and litigation.
Call the business lawyers at the Katz Law Group at (508) 480-8202 or contact them online for help in Worcester, Marlborough, Framingham, the MetroWest area, or Norfolk or Middlesex Counties.
