What Are Articles of Partnership?
Articles of partnership is a contract that forms an agreement among business partners to pool labor and capital and share in profit, loss, and liability. Such a document acts as a rule book for limited partnerships by outlining all the conditions under which parties enter into a partnership. Articles of partnership may also be referred to as a partnership agreement, especially outside of North America.
Of all the aspects of a partnership, how partner contributions are handled is among the most important.
Understanding Articles of Partnership
Parties agree to articles of partnership voluntarily. An articles of partnership agreement is not legally required by any regulatory body but is considered a best practice. Articles of partnership can be useful in preventing and resolving disagreements among partners since it clarifies the terms of the relationship and outlines how a partnership's assets are shared.
Articles of partnership should indicate who has what duties, but it doesn't have to delegate every task that could conceivably come up. It should assign certain key duties, such as who is responsible for keeping track of income and expenses and who will manage inventory, and specify what decisions can be made by whom. In addition, you should consider including clauses discussing whether partners are allowed to work for other companies outside the partnership or whether there should be a non-compete agreement if one partner leaves the business.
- Articles of partnership formalize an agreement among business partners to pool labor and capital and share in profit, loss, and liability.
- Articles of partnership should spell out who has what duties, but it doesn't have to delegate every task that could conceivably come up.
Several items related to the formation of a partnership are covered in a typical articles of partnership. They include:
- The names of the parties in the partnership
- The partnership's principal place of business
- The purpose of the partnership's business
- The terms of the partnership
- When the partnership will begin and, if not infinite, when and how it will end
- Each partner's capital contribution
- Each partner's percentage of interest in the partnership
- How the partnership's profits will be distributed (equally is the default, but there may be special conditions)
- How the partnership will be managed
- How salaries (if any) will be distributed
- How and under what conditions partnership rights can be transferred or sold
For example, if one partner provided the initial idea for the partnership but no cash, and the remainder of the partners contributed an equal sum, will each partner be considered equal regardless of cash contribution?
Similarly, an articles of partnership agreement can remove the possibility of disputes over which partner is responsible for certain duties and which partners have special privileges or are in charge of specific tasks. It may also award a partner the authority to make decisions without the consent of other partners and how to treat partners who want to work outside of the partnership or leave it outright.
Such an agreement will help a partnership avoid potential disputes related to profit or loss distributions by setting rules governing it ahead of time. For example, if a partner contributed more time or money than other partners, they might expect a larger share of the profits.