What is a Partnership Agreement?

Also known as articles of partnership, a partnership agreement establishes the working relationship between two or more entities that embark on a joint business venture. The terms of the agreement will vary, depending on the nature of the venture, the number of participants in the partnership, and any governmental regulations that must be met in order for the agreement to be binding. At its core, the voluntary agreement helps to define how each partner will relate to the other in terms of tax, legal, and organizational aspects of the venture.

To a degree, a partnership agreement functions as one of the founding documents for the business venture. The role of each partner is defined, in terms of what he or she will contribute to the effort. The contribution may be in terms of the capital provided to launch and support the operation of the business, the skills that each partner brings to the business, or the amount of labor that each partner will devote to achieving the stated goals of the venture. By defining the contributions of each partner, the agreement makes it clear what responsibilities the respective partners will assume, how those responsibilities may overlap, and who is held accountable for various aspects of the operation of the company.

While the exact structure of a partnership agreement will vary from one situation to another, there are several key sections that should be included within the text. One has to do with the assigning of specific powers or authority over a given department or section of the business enterprise. This helps to minimize confusion as to who is in charge of specific functions, effectively making the operation of the business more efficient.

Another common provision in the partnership agreement has to do with how decisions are made among the partners. While this process may be relatively simple when only two partners are involved, a more comprehensive approach is necessary if several partners are included in the agreement. Defining the decision making process, as well as how information in general will flow through the organization, also makes it possible to utilize available resources to best advantage.

Conflicts of interest are often addressed in the terms and provisions of a partnership agreement. Essentially, this means that no partner will engage in outside business activities that could compromise the integrity or the security of the business venture. Along with identifying what constitutes a conflict of interest, the agreement will usually also define how to resolve any conflicts of interest that may become apparent, up to and including procedures for expelling a partner from the business.

Every partnership agreement must also include details on how the assets of the business are accounted for on a monthly, semi-annual, and annual basis. To a degree, the laws and regulations current in force in the local jurisdiction will influence these processes. Using those regulations as a foundation, the partners will further define how sales are reported, how the payables and receivables of the business will be maintained, and how the various obligations of the business, including the payment of taxes, will be handled.