Definition: A partnership contract, also called the articles of partnership, is a document that establishes the terms of the partnership and the agreements between partners. A partnership contract does not always have to be written. People can form a verbally binding contract just by forming an agreement in a business discussion.
Obviously, all partnership contracts and agreements should be in writing in case of disputes in the future. It’s best to have an attorney draft a partnership contract whenever your form a new business with a partner.
What Does Partnership Contract Mean?
What is included in a partnership agreement?
Partnership contracts generally contain seven main pieces of information.
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- Partner’s names and contributions amounts
- The rights and duties of each partner
- Income and loss percentages
- Withdrawal limits and agreements
- Disagreement processes
- Processes to add new partners or allow existing partner to leave
- Succession planning in case a partner dies
Example
As you can see, the partnership contract spells out all the major “technical” details in a partnership agreement. All of these details are important, but some are more important than others. For instances, the contract sets the profit and loss percentage share. This governs how much of the profit each partner receives every year. Most of the time profit and loss percentages are divided by the ownership share in the partnership.
So a 30 percent owner would receive 30 percent of the profits and losses. This isn’t always the case however. The partnership agreement can stipulate a 30 percent owner can receive 50 percent of the profits. Usually the rational for this type of agreement is the 30 percent owner does the majority of the work in the company.
Needless to say, a partnership contract is an important part of forming a new entity.
