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Partnership agreements: Plans for all seasons

On Behalf of | May 26, 2022 | Business Entities

The basic definition of a partnership is simple: Two or more people who associate to carry on business for profit create a partnership. The most valuable instrument in the partnership, the written partnership agreement, legally binds all partners. The agreement establishes the terms upon which to address the fundamental questions — who, what, where, when and how? — essential to weather unforeseen changes.

A partnership agreement facilitates the adjustments necessary when unforeseen circumstances arise. What will each partner contribute: money or labor? Who determines whether to add or remove partners? How do partners receive compensation and pay taxes? When may a partner pursue other ventures? Where and under whose state laws will partners resolve conflicts?

Specific provisions within a partnership agreement will vary depending upon the type of partnership created. Limited partnerships (LPs) separate financial and management duties and obligations between limited and general partners. Limited liability partnerships insulate all partners from personal liability. Thus, the agreement can reflect the partners’ legal relationship.

Revised Uniform Partnership Act (RUPA)

Statutes enacted in Texas, known collectively as the Revised Uniform Partnership Act, resolve issues unaddressed in a partnership agreement. These laws, for example, terminate the partnership automatically when one partner leaves. They also apportion profits equitably among partners despite unequal contributions.

Standard provisions operate to provide some relief to parties. They fail, however, to account for human capital and unique family circumstances. Partnership agreements permit partners to craft rules and outcomes specific to their interests and needs.

Business experience matters

Even the most like-minded and closest associates will not agree on the business’ best interests over time. One partner’s personal life may change without notice. Experienced legal professionals can explain the benefits of a partnership and how to include the appropriate content within a partnership agreement.