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Key Elements in Pennsylvania Partnership Agreement

If you are considering going into Business with one or more people, it is essential to have a Partnership Agreement. A well-conceived agreement will clarify each partner’s rights and obligations and determine how conflicts will be resolved when they arise. Let’s take a look at the key elements of a partnership agreement.

What Should a Partnership Agreement Include?

A partnership agreement outlines the ownership of the business, as well as how the partners will manage the business, investments, profits, and losses. There are several elements that must be included when drafting the agreement, including:

The Partnership Name

The contract should start by stating the name of the company and the names of the partners so that each member is held accountable for the terms of the partnership agreement.

Ownership

A partnership agreement should spell out how ownership of the business is divided. The contract should also stipulate how ownership will be allocated if a partner leaves, retires, or dies, or if the business is sold.

Allocations of Profits and Losses

A contract for a business partnership must specify how profits and losses will be allocated among the partners. This includes how much each partner will be paid and how losses will be prorated based on each partner’s investment.

Decision-Making Authority

In order to avoid disputes, it is essential to establish decision-making guidelines and voting rights at the outset. Typically, each partner is given the authority to make decisions based on how much they have invested in the business.

Financial Contributions

Each partner’s financial contribution upon startup must be written into the partnership agreement to avoid potential disputes when divvying up labor, profits, and losses.

Workload

Division of the workload among partners is a common cause of disputes in business partnerships. So, it is wise to sort out each partner’s duties in the agreement and who is responsible for specific business decisions. Given the potential for disputes over who does what, it is crucial to choose the right business partners.

Compensation

Determining how profits will be paid out to each partner is a key element of a partnership agreement. To ensure that each partner is compensated fairly for their efforts, however, it is necessary to draw a line between income and profits.

Dispute Resolution

Any business agreement should establish a method for resolving disputes to avoid costly litigation and the potential of business failure. Common methods for dispute resolution in partnerships include mediation and arbitration, while some companies may opt to establish an independent business advisory board.

Death

Confronting our mortality is daunting, but it is crucial to make arrangements in case of a partner’s death. Ultimately, a partnership agreement should include a buy-sell provision that specifies how a deceased partner’s shares will be transferred. In this situation, it is common for the partners to take out life insurance policies that name the other partners as beneficiaries, with the proceeds of the policy being used to fund the share purchase.

New Partners

Interests in a partnership can be sold, passed on to family members if a partner dies, or subjected to a divorce settlement. Therefore, the agreement should establish an entry plan that sets reasonable restrictions on the transfer and sale of business interests and specifies the conditions under which a new partner can enter the business, such as through a unanimous vote. Ultimately, a properly drafted partnership agreement will maintain control of ownership and allow each partner to retain their percentage stake.

An Exit Plan

Finally, a partnership agreement will stipulate the way in which partners can leave the business, state whether partners can be expelled for not fulfilling their responsibilities, and establish a plan for dissolving the business if/when all partners agree to end operations.

The Takeaway

Establishing a partnership can help to achieve your business objectives as long as you have a properly structured contract. If a partnership agreement is vague, disputes may lead to business failure. The best way to ensure that the key elements are included in your partnership agreement is to consult with an experienced business attorney.

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Key Elements in Pennsylvania Partnership Agreement

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