Happy Post- Thanksgiving Break. I ate a lotta turkey down in College Station, Texas over the weekend. So I’ve been getting a lot of questions about partnership agreements lately. A partnership arises when two or more people agree to share in the profits and losses of a business. Oftentimes in business, especially in the food and agriculture industry, partnerships are formed inadvertently. Are you sharing profits with another person? If so, then you have a partnership! And you should have a written partnership agreement to make sure the terms of that partnership are super clear (and will hopefully avoid a disagreement later!).
In way of background, there are different types of partnerships depending on the needs of the business:
- General Partnership: A general partnership is two or more people carrying out a business purpose where the partners share equal rights and responsibilities for managing the business.
- Limited Partnership: A limited partnership allows each partner to restrict his or her personal responsibility to the amount of his or her investment. At least one person must assume general partnership status.This requires filing forms with your state. If you haven’t filed any papers with your state’s department or secretary of state then you likely have a GENERAL partnership.
Once the parties going into business together decide which type of partnership is best for the business they will be running, the next step is to write a partnership agreement. Some provisions that should be considered to partnership agreements include:
- Type of partnership: The agreement should clearly state the type of partnership the parties are entering into.
- Names and addresses of partners: The agreement should state names and addresses of each party, including any formal business organizations or those pesky DBA’s.
- Name of partnership: Before deciding on a name for the partnership, a Google and trademark search should be completed to ensure that the name is not infringing on a trademark. I mean, who wants to be served with a cease and desist letter? Ah, not me. And you shouldn’t want one either so just make sure someone else isn’t using your partnership name in your same class of goods or services.
- Purpose of the partnership: The purpose and scope of the partnership should be memorialized clearly in the agreement.
- Term of the partnership: The term of the partnership should be narrowly defined depending on how long the purpose of the partnership will remain.
- Initial contribution of each partner: The agreement should clearly define how much capital each partner will be contributing initially, if anything (not required!). This clause should also include when payment will be made and the instructions on how payment will be made.
- Additional contribution requirement: After the initial contribution, any other required maintenance or required payments or services should be provided for in the partnership agreement.
- Assets of the partnership: It is important that the partnership itemize and accurately describe the assets of the partnership in the agreement.
- Liability of the partnership: The partnership agreement should state what liability, if any, partners have to each other.
- Allocation of profits and losses: Under default rules, profits and losses will be shared equally. If partners want to deviate from that rule, they should clearly state the deviation in the agreement (or just note it anyway cuz lawyers love to write!).
- Distribution of profits: “Distribution” is identified as the actual payout of the profits. The agreement should memorialize procedures for making the distribution, ability to receive advance payments or draws from anticipated earnings, identification of person(s) that will declare the distributions, and timing of distributions, as well as any limitations on distributions.
- Duties of the partners: The agreement should state the responsibilities of each partner and any prohibition of activities. This should also include rights and responsibilities of limited partners (i.e., if you’re in that fancy dancy “limited partnership”).
- Confidentiality: If a non-disclosure agreement is not entered into separately, the partnership agreement should include a confidentiality clause. This just makes common sense. I mean, who wants their trade secrets posted on Twitter one day (not me, not me!).
- Salaries and other benefits: Salaries, vacations, health insurance, holidays, retirement, and any other benefits for the partners CAN be addressed in the agreement. You don’t have to get this technical. For some partnerships, Keep It Simple Stupid. However, for others, the more detail the better!
- Management of the business: If the partnership will be managed by only certain partners, those partners should be identified in the agreement.
- Effect of default: The partnership agreement should discuss what would happen if one or more partners is in default after a certain period of time (e.g., 30 days, 60 days).
- Amendments: The partnership agreement should allow for amendments to be made in writing agreed by a certain percentage of the votes from the partners. I mean, who wants a partnership agreement to last forever eva, ever-eva? Gotta be able to change that sucker when the need arises.
- Partner changes: You’re growing? Holla! Oh, you mean you HOPE to grow or change over the years. Of course! The agreement should detail process for removal of partners and withdrawal of partners, including voting process and redistribution of assets.
- Dissolution and winding up: And that’s the end of the story…. The partnership agreement should enumerate facts and circumstances that may lead to dissolution of the partnership and procedure for winding up the business, including distribution of assets.
Those are just a few ideas. Partnership agreements really have to be individually tailored to the special needs of your business. There is no one-size-fits all partnership agreement. Oh, and we can help you! Just give Rincker Law, PLLC buzz.
Want more information on contracts for the food and agriculture industry? Check out my first book that I co-authored with Pat Dillon, an Iowa agriculture lawyer titled “Field Manual: Legal Guide for New York Farmers and Food Entrepreneurs” available on CreateSpace, Amazon, Kindle and iBooks. You can find out more about this book here. Furthermore, you can check out this extensive outline on common agriculture contracts on my JD Supra page prepared for this Lawline.com presentation.