A partnership agreement refers to a legal contract which specifies the roles and rights of entities within a business. Typically, this agreement describes the relationships that the partners have with each other, as well as with the business. This document is usually important to draft at the start of the business, so that each partner will have a clear idea about their roles and rights in the company. It is also a mandatory document when starting some types of business in some states.
One of the important clauses in a partnership agreement is to do with how profits are shared. This can be a contentious issue unless it is discussed beforehand, and then put in writing in the partnership agreement. This way, the risk of falling out due to misunderstandings is limited since one would refer to the agreement for clarification.
The duties of each partner are also clearly delineated in the partnership agreement. For instance, some partners may be considered angel investors, where they simply fund the business and own a part of it but don’t take part in its management. The partners’ roles have to be clearly defined as well.
These are just a few of the common clauses found in a partnership agreement. In most cases, they need to cover broader topics than the above in order to be effective. However, it’s important to ensure that the partnership agreement is in line with state and federal laws governing business, which is why having a lawyer involved in the drafting process is important.