1. Ownership
Ownership is usually determined by the amount of capital contributions given to the Partnership upon startup. However, some Partnerships also use cost and profit shares to determine ownership. In any case, you should use this section of the Agreement to define each Partner's percentage of ownership of the total Partnership. All percentages added should equal 100%.
2. Duration of a Partnership
One disadvantage of a partnership is that its existence is contingent upon the continued ownership by all the partners. For example, if an owner withdraws from the partnership or dies, the partnership would terminate, unless the remaining partners consent to the continuation of the business. Such unanimous consent may be difficult to obtain.
Partners may wish to provide that the remaining partners will purchase the withdrawing partner's share or buy back a deceased partner's share from the deceased partner's estate. Or, a partnership agreement might provide a simplified procedure for securing the remaining partners' consent to the continued existence of the business despite one partner's death or withdrawal.
3. Management Roles
Some partnerships assign management roles to their partners. Not all partners need to have a management role. Usually limited partners have no management authority. If certain Partners will take on a specific management role, you should use this section of the agreement to define what those roles will be.
4. Transfer of Ownership
A potential problem for any business with more than one owner is whether each owner will have the unrestricted ability to transfer/sell his or her shares to anyone he or she wishes. Many small business owners wish to protect themselves against the possibility that one of the other owners will transfer his or her ownership interest to an undesirable third party. If transferability of ownership is a concern, it is important to address this issue when the entity is formed.
Many partners also may wish to establish a method for handling the ownership interest of a partner who dies. It is often advisable to have the partnership buy the interest of the deceased partner and the parties may wish to agree in advance on how to value such a share, the procedure for buying the interest, and other concerns. Additionally, the partners may need to buy life insurance or make other plans to ensure that the partnership will have sufficient capital to buy the deceased partner's interest.
The partnership agreement should address these important issues:
a. Restrictions on the transfer of a partnership interest;
b. A method for determining the value of a partnership interest;
c. Voluntary withdrawal from the partnership by a partner;
d. The transfer of a deceased partner's interest;
e. How to handle the disability of a partner who is involved significantly in the partnership; and
f. A means of funding any required purchase of a partnership interest.
You can specify the terms of an ownership transfer with a Rocket Lawyer Partnership Agreement.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
