Partnership agreements are contracts that are entered into by partners for the sake of managing their business relationship. An agreement can help ensure that the rights, obligations, and expectations of each partner are clearly stated. Careful drafting is essential to each partner understanding his or her role in the business and enforcing the terms of the contract in court if necessary.

Before entering into a partnership, it is essential that you have an attorney write a partnership agreement that protects you and binds the other parties to your venture. Our law firm can also draft a contract in the event the partnership has already formed or we can modify an existing partnership agreement. Find out why so many Houston business partners count on the dedicated counsel of Capstone Legal Strategies.

Different Types of Partnerships In Texas

Texas law recognizes four types of partnerships. Before deciding the contents of your partnership agreement, you need to decide which partnership structure is best for your organization. Your options are:

General Partnership (GP)

This is the most common type of partnership in Texas. Partners in a GP are all personally liable for partnership debts, including in the event a court enters a judgment for damages against the business. They also share an equal duty of running the business. Each partner reports income on his or her individual tax return, but the GP pays no franchise tax.

Limited Partnership (LP)

In a limited partnership, there are both limited and general partners. The general partner is liable for all debts, while limited partners are only liable for those debts that are associated with their investments in the business. All partners are personally responsible for paying taxes, but the limited partner is only required to pay taxes on income from their share of the business.

General partners have a greater say than limited partners in how the business is run, and the partnership agreement can further define the contours of their respective rights. A franchise tax is usually levied on the LP.

Limited Liability Partnership (LLP)

Businesses with high liability risks are more likely than others to form as an LLP. The liability exposure of each partner only extends to the portion of the business they directly created. Partners are not liable for the debts of other partners, but the LLP does pay a franchise tax.

Joint Venture

This special type of GP is created for a limited purpose and exists until that purpose has been fulfilled. Joint ventures are common in real estate or foreign investments and will usually last until a specific transaction is completed. Joint venture partners are fully liable for their debts and, just as with a GP, they report income on their individual tax returns.

The Importance of a Partnership Agreement

Determining which type of partnership you have is a necessary first step. The specifics of your business relationship with the other partners will then need to be defined, which is where a partnership agreement will prove essential. In the absence of an agreement, it is highly likely that you will experience conflicts over the following:

  • Profit and loss sharing: When the business succeeds and earns a profit, the partners need to be able to divide them without disputes. Losses, including in the form of liabilities, should also be apportioned. Failure to define profit and loss sharing is a prime source of animosity.
  • Capital Contributions: All partners should understand what each partner is contributing to the partnership, whether it be cash, property, or services, and detail how additional contributions will be handled.
  • Decision-making authority: There should be a clear process for making decisions as an organization. If a partner’s role is murky, decisions will be delayed. This can lead unnecessarily to lost opportunities and harm to the business.
  • Financial management: Which partners have authority to spend partnership funds, on what, and in what amount? Who is responsible for handling the money, giving a proper accounting, and ensuring funds are available for major expenditures? Partners need to allocate these responsibilities to protect the viability of the company.
  • Dissolution: Without an agreement, partners could argue over how to split up assets and share debts if the partnership dissolves. All it takes is one partner exiting the business to throw the entire organization into chaos and litigation.

Terms To Include In Your Partnership

Considering the above undesirable outcomes, your partnership agreement should include the following, at a minimum:

Basic Information

The name of the partnership, its purpose, and the identity of its members should all be included. If there is a set duration for the partnership, it needs to be stated. The legal name of the partnership will also be set forth here.

Partners’ Roles

Detail each partner’s responsibilities in the company. Who is in charge of daily business operations? Which partner makes major decisions such as purchases or entering into and approving contracts? Who hires and fires employees and third parties like accountants? All of these, and more, should be spelled out.

Decision-Making

Similarly, there should be a process for making significant decisions. This process is not necessarily applicable to mundane activities like purchasing supplies for the business. However, major partnership decisions need to be submitted to a properly defined procedure. Also, the decisions should be fully and clearly documented (e.g. in the form of meeting minutes).

Income and Debts

As mentioned above, how profits and losses are shared can be a point of contention without a partnership agreement. The exact share of income and debts will largely depend on each member’s contribution to the business and their liability exposure.

Finances

Next, the agreement should specify that the partnership’s finances need to be kept in a separate bank account. Mixing personal and partnership funds is one way to inadvertently incur liability. Designate a partner to manage the bank account, track finances, and handle accounting and valuation.

Partnership Death or Withdrawal and Dissolution

If a partner dies or leaves the business, he or she may need to have their interest bought out. The question of what happens to the partnership will also need to be addressed. Does it continue or dissolve? If it dissolves, a process must be in place to liquidate and dispense assets and pay partnership liabilities.

Dispute Resolution

Business disputes are inevitable, but they need not lead to a lawsuit. An internal dispute resolution method like mediation can be employed to resolve disputes and preserve the partnership.

Non-Compete and Non-Solicitation

These are two important restrictive covenants that protect the business. A non-compete agreement restricts the ability of a partner to leave the company and compete with it. Meanwhile, a non-solicitation agreement prevents a partner from siphoning clients if he or she leaves. Have an attorney draft these important terms to ensure they will be upheld in court.

Contact Our Houston Partnership Agreement Attorney

The above terms are not the only ones you will need for your partnership. Executing a customized, enforceable agreement that meets the needs of your partnership requires the guided representation of a seasoned business law attorney. Connect with Capstone Legal Strategies to get started today.