10 Elements Of a Partnership Agreement (Key Components)

“Two heads are better than one”– especially in a business. The business will benefit from two individuals’ perspectives, abilities, and expertise. However, without a well-drafted partnership agreement, “two heads might end up wrecking more havoc.”

But with the 10 elements of a partnership agreement, you can ensure your partnership yields only beneficial results.

Well-crafted partnerships offer clarity on the duties and responsibilities of partners. It also prevents misunderstandings during the whole partnership process.

Below, we’ve highlighted 10 elements of a partnership agreement.

But first:

What Is A Partnership Agreement?

Regardless of whom you are going into business with, any joint venture requires a formal agreement.

Therefore, a partnership agreement legally binds two or more individuals (or entities). The agreement outlines the responsibilities and duties of each partner, their capital contributions, etc.

With this formal document, partners have clarity on the expectations of all involved parties.

10 Elements Of A Partnership Agreement

These 10 elements of a partnership agreement are critical to drafting an excellent joint venture document.

1. Partnership Names

The first feature is the business name, the goals or purpose, and the partners’ names. Listing their names allows you to hold the right people responsible when necessary.

2. Ownership Interest

Partnership contracts highlight the company’s ownership allocation. This section analyzes every circumstance that might influence the division of ownership. For example, how will you distribute ownership when you sell your company?

3. Responsibilities

Each partner must outline their respective roles and responsibilities. It ensures all parties are held accountable for the success of the partnership.

4. Financials

Both partners must determine how profits, losses, or debts will be shared. This clarity enables you to avoid every misunderstanding regarding profits.

5. Intellectual Property

This clause outlines which party owns the intellectual property (IP) created during the partnership. It also mentions who can use it after the partnership is dissolved.

6. Duration & Termination

Another important section is defining a timeline for the partnership. You should indicate conditions under which either side can terminate without penalty.

7. Conflict Resolution

Establish methods for resolving conflicts that may arise during the agreement. The best way to resolve disputes is to work with a predetermined mediator.

8. Management And Voting

Emphasize how you will manage the company activities and the voting power of each partner in the company.

9. Death Or Disability

Death is a natural occurrence. It sneaks up on people. Hence, it’s necessary to consider the possibility in your contract.

In cases of death or disability, what happens? Partners may transfer their stake to their partner, kids, or spouse through a testamentary means.

The partners need to decide if they want family members to run the business in case of death or disability.

10. New Partners

Changes occur even in partnership businesses, and your contracts should make provisions for that. What situations will warrant a new partner? How will you pay the new partner? What level of authority will you have? Such details offer a clear insight into handling unique situations like this.

In A Nutshell

An elusive business contract can cause a series of disagreements down the lane. Or in the worst cases, it disrupts business operations and ends them abruptly.

But having a detailed partnership agreement with all the necessary elements saves you from issues.

How can you ensure your contract is compendious? Use Contract Management Software. That way, you can ensure you leave nothing behind.