What are Articles of Partnership?
Articles of Partnership are formal written agreements between people who want to go into business together. The contract spells out all the essential details about how the business partnership will work. It says what each partner is responsible for, how they will share profits and losses, and what happens if there are problems or if they want to end the partnership.
Why Articles of Partnership are Important
Having an explicit partnership agreement in writing is very important. It forces the partners to discuss and agree on critical issues upfront before problems arise later. The Articles of Partnership document can prevent many arguments and misunderstandings. If there is a dispute between the partners, they can look at the agreement to remember what they decided together when they started the business.
What’s Included in Articles of Partnership
Most Articles of Partnership cover a standard set of topics:
Responsibilities of Each Partner
The agreement defines each partner’s role in running the business daily. It also represents their roles, titles, and authority to make decisions for the partnership. For example, one partner might oversee marketing and sales while another oversees product development.
Ownership and Profit Sharing
A vital part of the agreement is deciding what percentage of the business each partner owns. Ownership affects how the partners split up the business’s profits. Typically, the partners share profits according to their percentage of ownership, so an equal partnership means the partners share profits 50/50.
Salaries and Compensation
If the partners will be working in the business full-time, the agreement usually states how much salary or other compensation each partner will receive for their work. This is separate from their share of the profits as owners.
Adding New Partners
Over time, the partners may want to bring new partners into the business. The agreement sets the rules for this, like how to decide on new partners, how much ownership they get, and how that dilutes the ownership of the existing partners.
Partner Meetings and Voting
The agreement states how often the partners will meet to discuss the business and how they will make decisions together. Usually, the partners’ majority or unanimous vote is required to make big decisions or change the partnership agreement.
Resolving Disputes
Even the best partnerships can sometimes have disagreements. The Articles of Partnership state how disputes between the partners will be resolved, often through arbitration or mediation. This means bringing in a neutral third party to help find a solution without going to court.
Ending the Partnership
Inevitably, partnerships end at some point—maybe the business is sold, or a partner retires or dies. The agreement outlines the process for ending or dissolving the partnership. This includes valuing each partner’s share, dividing assets, and tying loose ends. Having this spelled out beforehand makes a difficult situation a bit easier.
Limited Partners vs General Partners
Some partnerships have different types of partners with other roles. The most common are limited partners and general partners:
- Limited partners typically invest money in the business but don’t help run it day-to-day. Their liability for the partnership’s debts is “limited” to their investment amount.
- General partners are more actively involved in operating and managing the business. They usually have “unlimited” personal liability for the partnership’s obligations.
The Articles of Partnership agreement defines the roles and responsibilities of both limited and general partners.
