8 Insane Advantages of a Partnership Agreement (2022 Guide)

What Exactly Is A Partnership Agreement? 10 ELEMENTS Of A Partnership Agreement

The 10 elements of a partnership agreement are simple.

Let’s take a look.

When a few people or entities agree to enter into a structured business, all parties sign a contract. The contract discusses many different details regarding the partnership you’re about to get into.

The contract covers:

1. Avoids state default rules of how the partnership will operate.
2. All relevant contact information of each party.
3. The length of the partnership
4. The amount each party contributed.
5. The percentage each party owns of the partnership.
6. Voting rights for each party.
7. An outline of all benefits / profits being split amongst the parties.
8. Liabilities being split.
9. How to add new partners.
10. An exit strategy to get out of the partnership.

We call this contract, a “partnership agreement”.

Here, check out this sample.

Heads up about the elements of a partnership agreement!!

It is important to note, if people / individuals sign the partnership agreement (and NOT entities), then the individuals will personally be responsible for any liabilities. Meaning, that their personal assets have NO protection. However, if entities sign the partnership agreement (and NOT individuals), then the entities will be responsible for any liabilities that come up in the future.

The individuals’ assets will not be at risk. For this reason, it may be in your best interest to create an LLC when entering a partnership. This will legally protect your personal assets.

Purpose Of Partnership Agreement: The MOST Specific Comparison

Similar to the operating agreement of your LLC, your partnership agreement will tell you how your partnership will operate. You will outline what financial and functional decisions you can and will make. This includes rules, regulations, and provisions. The purpose of your partnership agreement is to govern the internal operations of your partnership. It is done in a way that works for all of your partners. Once your partners sign the partnership agreement, it is an official contract and it binds your partners to its terms.

What's The Purpose Of A Partnership Agreement? YOU DESERVE BETTER

If you ask us, it’s a no-brainer, when it comes to the partnership agreement advantages and disadvantages.

GO DO IT!

If you plan on doing business with another individual / entity, and you have to choose between doing business with partnership agreement or without a partnership agreement, you best believe that we’ll pick partnership agreement 10 times over.

The advantages of a partnership agreement are clear-as-day.

Look, many people (that we actually know) go into business with their friends and they find themselves excited about what the future holds. They can’t imagine that there will be disagreements. Unfortunately, it doesn’t always work out; it gets messy (things happen). Now, if you don’t have a partnership agreement to sort things out, then things could get pretty pricey. You might even find yourself feeling forced to take legal action. The partnership advantages are very clear.

WHY NOT MAKE AN AGREEMENT THAT WILL SORT OF THIS KIND OF STUFF? If you choose NOT to sign a partnership agreement, then your partnership will fall under the general provisions of the state statutes governing partnerships.

C’MON! YOU DESERVE BETTER!

Do you really want to find yourself stuck into the rules that you did NOT choose? Do the smart thing and get a partnership agreement. You want to understand the advantages of a partnership agreement.

Advantages Of A Partnership: 8 PROS Of Getting A Partnership Agreement

By making a partnership agreement you:

Advantage #1: Prevent Your State's Default Rules.

You’re right. It is hypothetically possible for a partnership to exist without having a partnership agreement. However, if you do NOT have a partnership agreement, then your partnership will be subject to the general provisions of your state’s default governing laws.

A lot of these laws will not be how you want your partnership to operate. That’s the purpose of a partnership.

Advantage #2: Don't Have To Split The Profits And Losses 50% 50%.

As we mentioned before, your state’s “default” laws may not be in sync with what you want. A common example will be how you divide the profits and losses of your partnership.

The default provisions declare that the profits and liabilities get split in the middle; 50% 50%. In the event that your partnership is not a 50% 50% agreement, then this can really come to haunt you legally. That’s the purpose of a partnership.

Advantage #3: Clarify Each Party's’ Duties And Responsibilities.

In order for a partnership to succeed, teamwork is key. This means each party MUST be aware of what his responsibilities are in order to efficiently complete his tasks. In the event that a specific party does NOT what his duties are, how will your partners fulfill their duties?

Under the default partnership guidelines, a partner can do whatever he wants without the permission of the other partners. If that’s the case, then the answer is that your partners will NOT complete their duties with coordination. That will really hold back the growth of the partnership and basically defeat the purpose of the partnership to begin with. That’s the purpose of a partnership.

Advantage #4: Establish Both Voting rights And How Decisions Are Made.

Lets say your partnership is at a crossword. There is a disagreement within the partnership if you should turn right, turn left, or continue going straight. What do you do? How are decisions made when there is a disagreement within the partnership? The partnership agreement will set forth clear guidelines regarding how your partnership makes decisions. That’s the purpose of a partnership.

Advantage #5: Reduce Money Related Disputes.

Generally, partners are equal in the profits and losses. This may be an issue if one of the partners invested more money in the partnership.

He screams “Why am I considered an equal with my partners?”

A partnership agreement will set forth explicitly how much each party in the partnership invested initially, what the startup costs were, and various other factors. This will prevent A LOT of disputes within the partnership. That’s the purpose of a partnership.

Advantage #6: Create A Specific Entry Plan For New Partners (that's suitable for you).

Many times, an already existing partnership wants to add a new partner into the mix.

For example, a member passes his share in your partnership to family. In order to protect already existing partners, it is important to set forth a specific way how a new party can include himself in the partnership. It will prevent uninvited guests from digging in to your partnership.

You want a specific process that will be suitable for you. With a partnership agreement in place, you place restrictions on allowing new entities to enter the partnership, such as a unanimous vote. That’s the purpose of a partnership.

Advantage #7: Establish An Exit Plan.

With the default provisions set forth by the state, any partner can break-up your partnership at any time. Also, a death or bankruptcy can dissolve a partnership.

With a partnership agreement in place, it sets forth stipulations both  how AND when a partner can leave. It will also stipulate both the implications an exit will have on your partnership and  a plan to dissolve the entire partnership. Additionally, and MORE importantly, a partnership agreement will set forth specific times that a partner can expel another in the event of poor performance. That’s the purpose of a partnership.

Advantage #8: Avoid PRICEY Legal Proceedings.

Granted. Forming a partnership agreement can cost a bit. It may also add to your startup costs. But, this small addition to your costs will be peanuts compared to the hefty legal fees that will exist without a partnership agreement.

Disputes within a partnership WILL happen. The BEST precaution you can take in your partnership, is to make a partnership agreement. It will save you BOTH your time AND your money. That’s the purpose of a partnership.

Conclusion

After looking at the advantages of a partnership agreement, it is clear as black-on-white; it is a definitely the better decision. As we mentioned before – YOU DESERVE BETTER! It may take a little time and it may cost a little money, but the partnership advantages are definitely worthwhile.