Here are some Frequently Asked Questions dealing with Partnership Agreements.

Q:  What exactly is a partnership, in the business sense?

A:  In the business world, a partnership occurs when two or more individuals form a business organization for the purpose of making a profit, and the partnered individuals manage and operate that business.  Each partner shares a certain percentage of the partnership’s profits and losses.  The types of partnerships can vary, as do whether or not the partners can be held personally liable for company debts and obligations.  One important advantage that partnerships offer is that partnership income is only taxed once, contrasted to corporations, which are taxed at two levels:  first as a corporate entity, and then with shareholders being taxed on any earned dividends.

Q:  What kind of partnerships are there?

A.  There are typically two types of partnerships:  general partnerships and limited liability partnerships.  In limited liability partnerships, there are one or more general partners and one or more limited liability partners.  The general partner is responsible for actively managing the business and possibly contributing capital toward the partnership.  The limited liability partner contributes capital to the partnership but has no active role in the running of the business.  In general partnerships, all partners are general partners who share unlimited liability for all partnership debts and obligations.

Q:  How is a partnership created?

A:  This is where a partnership agreement comes into play.  The most typical method to create a partnership is by entering into a contract, such as a partnership agreement, that sets out the relevant terms of the partnership in order to ensure that all intended partnership terms are upheld later should the partnership unfortunately head south.  Keep in mind that courts sometimes finds that a partnership exists even when no formal contract was entered into by the parties, depending upon the characteristics of the relationship between the parties.

Q:  How and when can you end a partnership?

A:  Again, this depends upon the specific partnership agreement.  The parties can specify that the partnership will end on a certain date, or upon the fulfillment of certain tasks or obligations.  Sometimes partnerships can end upon the death or bankruptcy of one partner, unless the partnership agreement states otherwise.  In the absence of a partnership agreement, one partner may inform the other partner(s) in writing that the party is withdrawing from the partnership:  although the withdrawing partner may be held liable for any damages that his or her withdrawal causes to the other partners.

Q:  Do we have to file our general partnership agreement?

A:  General partnership agreements do not have to be filed, since a general partnership is simply an agreement between the partners.  Companies like limited liability partnerships, limited liability companies, and corporations, on the other hand, are required to register to qualify for limited liability protection.  General partnerships are provided no such protection, and all partners share unlimited liability for any partnership debts and liabilities.

Q:  What duties and obligations due I owe to my partner(s)?

A:  In short, partners owe each other–and the partnership–a fiduciary duty.  This means that you cannot compete with the partnership by operating or participating in a similar business in the same geographical area.  You also cannot personally take opportunities that the partnership could be interested in pursuing, and you cannot act in a willful or reckless manner that could possibly harm the partnership.

Q:  What other factors are important to consider before entering into a partnership agreement?

A:  Many factors should be considered before you enter into any such agreement, such as how trustworthy your partners are.  Probably the most important factor to take in, however, is the future growth potential of the company.  Partnerships can be perfect for lifestyle companies and companies that grow in a relatively slow manner.  For business models with significant risk, however, you may want to consider incorporating your company in order to limit your risk.