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.
What is a Partnership?
A partnership is a business relationship that gets formed whenever more than one person agrees to undertake a 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.
3 Types of Partnerships
Partnerships arrangements span a spectrum from informal to very structured, and include:
- General partnerships
- Limited partnerships
- Limited liability partnerships
A general partnership is the most informal. It is created when multiple people agree to go into business together.
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, 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
If these issues are not covered in the agreement, the Massachusetts partnership laws in M. G. L. c. 108A will step in to fill the gaps. In many cases, however, the rules that this provides are contrary to the partnership's best 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.