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What Is The Importance Of A Partnership Agreement?

Aug 17, 2007
A Partnership Agreement is a voluntary contract between two or more persons to enter into a business relationship between or among one another with the intention of carrying out the said business and sharing its profits/losses among themselves as agreed to in the document.

The parties to the agreement are referred to as Partners. The Partners agree to put all their capital, labor and skills towards achieving maximum gains from the venture. A Partnership Agreement will also spell out the manner in which it may be dissolved and must be signed and followed by each of the Partners.

A Partnership Agreement is defined as being an arrangement that is agreed to by all parties to the transaction and is an effectual method of helping each of the partners to:

* Agree to share a vision to collaborate together
* Set up mutually acceptable goals
* Specify the basis on which to begin working together
* Make sure that each of the partners are clear about about what needs to be achieved
* Assess the effectiveness of the agreement
* Bring out issues related to accountability and responsibility
* Lay a strong foundation that can sail through difficulties and testing times ahead

A partnership should begin small and slowly expand. It should be growing from year to year with annual reviews along the way to continuously improve it. There is no hard and fast way of writing out a Partnership Agreement but face to face discussions among partners, specifying special issues and setting these down in writing before actually drafting them into the document are some worthwhile preliminary steps worth following. The document, and any changes thereto, should be formally approved and signed by all the partners and dated.

The Partnership Agreement should begin with the name of the business as well as the nature of the business. The principle place of business should be to the address of the place of business. The date when the arrangement was made between the Partners and the term of its operation need to be expressly laid down in the agreement.

The amount of capital that the Partners will invest in the business will be held in a separate capital account and neither of the Partners will be able to withdraw any money from it. And, finally each individual capital account will be maintained in accordance with the profit sharing capabilities of the Partners as set forth in the agreement.

The income statement of the partnership shall be made individually in the names of each Partner and the profits/losses will be shared in accordance with the terms agreed to by each individual. Partnership profits or losses will be charged to the individual income accounts of the Partners. Partners are not entitled to draw any salary, but may draw upon their income accounts for any monies needed as defined in the partnership agreement.

The partnership may be voluntarily dissolved at any time with the mutual consent of the partners. In such an eventuality, the withdrawing partner should move reasonably swiftly to facilitate the liquidation. In case a partner was to die, the remaining partners will have the option to either liquidate the partnership or to buy out the share of the deceased partner.
About the Author
Wade Anderson is a CPA and operates DigitalWorkTools.com

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