How to Create a General Partnership Agreement

What Is a General Partnership Agreement?

A general partnership agreement is the key agreement between the partners that dictates the general aspects of how the partnership will be run. This document is essential for spelling out each partner’s ownership interest and role in the business. It also specifies the partners’ initial capital contributions as well as the procedures for selling an ownership interest and exiting the partnership.

Agreeing on these important terms goes a long way to preventing disputes from occurring down the road, and partnerships that forego creating a general partnership agreement often fail within just a few years of doing business.

This article explains how these agreements work and how to easily create one using LegalNature’s state of the art form builder and step-by-step guidance.

Partnership Information

On the first step you will enter the partnership's name, the effective date of the agreement, and the partnership’s business purpose and address. When choosing the partnership's name, it's a good idea to make sure that no other business is using a similar business name, otherwise you may find your partnership in violation of federal trade name laws.

With the effective date, you can choose any date on which you want the partnership agreement to go into effect. When including your business purpose, it's best to leave your purpose broad, so as to not limit your operations in the future. For instance, you might say your purpose is “the manufacture and sale of wood products and related goods.”

The agreement automatically says that your business purpose also allows you to “do all other lawful things to further its business purpose and conduct any other type of business that the partners may agree on from time to time.” However, remember that you can always amend your general partnership agreement in the future if need be.

Lastly, use the address of the partnership's primary place of business. If one hasn't been established yet, you can use the address of one of the partners.

Partner Information

Here you will simply select how many partners there are and enter their full legal names. The form builder allows you to include up to six partners.

Initial Capital Contribution

The total initial capital is how much money the partners are investing in the partnership to begin operations. The contribution deadline is the date by which each partner must deposit his or her initial capital contribution. Partners can always agree to invest additional capital contributions in the partnership at a later time.

Ownership

On this step you will enter each partner's ownership percentage in the partnership. For instance, if there are three partners and each will own an equal share of the partnership, then you would enter 33.3% for each. You can also choose here to customize each partner’s ownership share however you want.

Profits and Losses

Next, you will specify how the partners will divide profits and losses of the partnership. These are the net profits and net losses that the partnership either earns or suffers during each accounting cycle. You can then specify how often any net profits that remain will be distributed to the partners. The partners will always have the option of retaining earnings to reinvest them in the partnership. This is usually a good idea during the initial stages of the business to keep it growing.

Decision-Making and Management Roles

Here you can indicate how the partners will make important decisions. How decisions are to be made is completely at your discretion and usually depends on the number of partners and the type of industry, among other factors. Keep in mind that it is often advisable to try to avoid any possibility of a tied vote between the partners, which often arises if there is an even number of partners and a majority vote is required to pass any decision.

If there is an even number of partners, one way to avoid a tied vote is to choose an outside and independent advisor whose sole job is to advise the partnership and be the tiebreaker whenever the need arises. Another way to do this is to require partners holding a majority of the ownership interest to agree to pass any vote. This would avoid a tie so long as ownership interests are not allotted in such a way that 50/50 split in ownership could result.

Partnership Checks and Vacation Days

On this step simply indicate whether or not each partner has the authority to write checks drawing on a joint partnership bank account in the name of the partnership.

Next, you have the option of indicating how many vacation days each partner is allowed to take each year. This may not be necessary if the partners are not working full time.

Accounting

In answering whether you will use cash or accrual accounting, it’s important to know the difference between the two.

• Cash accounting records revenue when money is received and expenses when money is paid.
• Accrual accounting records revenue when it is earned and expenses when they become due. Most companies use accrual accounting unless they are very small.

Final Matters

The governing law is the law that will control the partnership and settle any disputes between the partners. Usually, partners choose the state of their headquarters, but this is not required. It is also recommended that you select to include an arbitration agreement. This will help you avoid the time and expense of settling disputes between the partners in a formal court of law.

Executing Your Agreement

After completing the steps, print out the general partnership agreement and have all the partners and their spouses (or domestic partners) sign it in front of a notary public.

Once the document is signed by all the parties involved, simply distribute copies to all the partners and you're done!

How to Create a General Partnership Agreement

If you need to create a partnership agreement then use our partnership agreement template to get started right now.