Essential Elements of a Strong Partnership Agreement

A successful business partnership thrives on clear communication, shared goals, and a well-defined framework for collaboration. A strong and workable partnership agreement acts as the cornerstone of this framework, outlining rights, responsibilities, and contingencies for various situations that may arise.

The following are elements that should be included in most every partnership agreement:

Contributions and Distributions

• Financial contributions — The agreement should clearly specify how initial and ongoing financial contributions will be made by each partner. This can be a fixed amount, a percentage of ownership, or based on specific roles within the business.
• Non-financial contributions — Partners may contribute essential skills, expertise, or time to the business. The agreement should acknowledge these non-monetary contributions and determine their value to the partnership.
• Profit and loss sharing — There should be a clear and fair method for distributing profits and losses among partners. This could be based on ownership percentages, specific contributions, or a combination of both.

Management and Decision-Making

• Management roles — The agreement should outline the partnership’s management structure, assigning specific roles and responsibilities to each partner. This could involve areas like sales, marketing, operations or financial management.
• Decision-making authority — There should be a set process for making crucial business decisions. Will it be based on majority vote, unanimous consent, or a designated leader’s discretion? Voting rights may be tied to ownership percentages and/or other factors.
• Deadlocks — The agreement should set a protocol for resolving situations where partners disagree on a critical decision. This could involve mediation, arbitration, or predetermined tie-breaking mechanisms.

Indemnification of Partners

The agreement should address how the partnership will handle liabilities incurred by individual partners while acting on behalf of the business, focusing on the following:

• Permissible activities — Specify activities that fall within the scope of authorized business operations, thereby affording partners protection from personal liability.
• Limitations — Define limitations on a partner’s authority to bind the partnership in financial or legal matters without prior consent.
• Insurance considerations — Consider incorporating provisions for obtaining appropriate insurance coverage to mitigate potential liabilities.

Partnership Changes and Buyouts

• Adding new partners — The agreement should define the process for introducing new partners into the business. This should include requirements for approval, investment expectations, and adjustments to ownership percentages.
• Partner buyouts — The agreement should address the circumstances under which a partner might exit the partnership, such as death, disability or voluntary exit, and it should specify the buyout process, valuation methods for determining a partner’s share and how the remaining partners will finance the buyout.

Dispute Resolution

A well-defined dispute resolution mechanism is useful for dealing with disagreements between partners. The agreement can include provisions for any of the following:

• Mediation — An attempt to resolve disputes through facilitated discussion.
• Arbitration — Binding dispute resolution by a neutral third party.
• Litigation — The governing jurisdiction and court system should be specified in case going to court is the only option.

Dissolution

The agreement should address how the partnership will be dissolved under various scenarios, such as:

• Mutual agreement — Define the process for dissolving the partnership with the consent of all partners.
• Breach of agreement — Outline the consequences of a partner’s violation of the agreement, which could lead to involuntary termination.
• Deadlock — Establish a process for dissolving the partnership if partners are unable to resolve critical issues.
• Distribution of assets — Specify how remaining assets and liabilities will be distributed among partners upon dissolution.

By incorporating these essential elements, you can create a workable partnership agreement that fosters a collaborative and successful business environment. Remember, guidance from an experienced Arizona partnership attorney can help ensure your agreement is tailored to your specific needs and protects the interests of all partners. 

Law Offices of Donald W. Hudspeth, P.C. in Phoenix delivers comprehensive counsel in partnership formation, and we can assist you with any other partnership issues, from disputes between partners to tax matters to partnership dissolution. To schedule a consultation, call our office today at 866-696-2033 or contact us online.