A partnership is a relatively simple business structure that can be easily established and maintained. It is important to keep in mind that a general partnership, which is discussed in this blog, is distinguishable from a limited partnership, limited liability partnership or limited liability company. A general partnership has few written or registration requirements, and the requisite income tax filings are straightforward. Individuals who enter into a general partnership may erroneously assume that a written agreement is not necessary because these types of partnerships can be established through oral consent and are not structurally complex. However, the absence of a written agreement can lead to confusion and conflict, which can negatively affect the financial health and longevity of the partnership. The most efficient way to minimize these risks and protect partnership assets is to prepare a written partnership agreement.
Although the California Uniform Partnership Act of 1994 states generally the rights and responsibilities of partners as to each other and their partnership, the operational management of a partnership is largely controlled by the partners themselves rather than by the law. Therefore, it is prudent to execute a formal document to set forth broadly how the entity will be governed and the respective rights and obligations of the partners. A written partnership agreement is also essential to allocating risk and planning for uncertainties, such as the death or dissolution of the partnership. A written agreement should ideally address key governance and financial matters, including the following:
· Profits and losses. The distribution of profits and losses in a partnership is determined by the partners. In general, a partner who accepts greater financial risk is entitled to a more significant portion of the profits as well as more decision making opportunities.
· Duties and responsibilities. Partners may assign duties and responsibilities to one another in whatever manner agreed upon. All partners have certain responsibilities, such as maintaining the books and records of the organization, in addition to the management duties assigned to them in the agreement.
· Voting rights. Partners can include provisions in the agreement that determine how future disputes will be settled (particularly in a two-person partnership). While each partner generally retains one, equal vote, a partnership agreement can create classes of partners with distinct voting rights when the partnership activities are complex or there are a large number of partners.
· Termination and withdrawal procedures. Partnerships can be set to dissolve automatically when one of the following events occur: death, expulsion, bankruptcy, inability to continue operating the business, or order of the court. Through the partnership agreement, partners can ensure that there is no confusion regarding events that could trigger dissolution of the partnership.
One of the distinguishing features of a general partnership is that each partner is personally liable for the debts and obligations of the partnership. A written agreement ensures that the partners understand their rights, responsibilities and obligations in operating the business.
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