Texas partnership agreements are, by statutory design, flexible documents. Partnerships are one of the oldest forms of business entities and vary widely in structure across industries and uses. Our goal in this post is to give a general overview of elements traditionally found in partnership agreements so you have a place to start discussions with your potential partners and an idea of when additional help may be needed.
Though Texas partnerships were created with flexibility in mind, they are subject to the Texas Business Organizations Code (TBOC) and persons considering forming a partnership should reference this law before following any of the tips contained herein.
Topics Usually Covered in Texas Partnership Agreements
The following is a non-exclusive list of topics a partnership agreement in Texas should address:
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Partnership Duration
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Purpose of the Partnership
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Amount of Required Initial Capital Contribution
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Mandatory or Voluntary Future Capital Contributions
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Sharing of Partnership Profits and Losses
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Limits on Transferring Partnership Interest
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Duties and Responsibilities of Each Partner
While some partnerships are created to exist in perpetuity, many are formed for a limited number of years. Limiting the duration of a partnership is most common in investment vehicles like limited partnerships, but can be done in any situation where the partners wish to either limit unforeseeable long-term risks or seek a specific tax advantage that requires the time cap.
Regardless of whether you dealing with a general, limited, or limited liability partnership, it is in everyone’s best interest to define the purpose of your partnership as narrowly as possible. This allows limited partners to feel comfortable that their funds are being used for a specific purpose and gives general partners clear guidelines on how they can and cannot used partnership property. Partnership purpose also comes into play in a wide variety of scenarios, including defining what “ordinary course of business” means and guiding potential “breach of fiduciary duty” cases.
Clauses regarding required capital contributions are often poorly written, especially when taken from boilerplate forms found online or from friends. Clarity and thoroughness are of utmost importance here. If one of the partners is contributing personal services, for example, a value for those services should be agreed upon beforehand and warranties as to performance should be considered. Regardless of what form initial capital contributions to a partnership may take, it is important to keep a capital account and include that information in your partnership agreement.
Partnerships are businesses, and businesses often require ongoing cash infusions to stay afloat and become profitable. Not surprisingly, clauses in partnership agreements regarding future capital contributions are some of the most complicated and litigated in existence. To save yourself and your other partners some grief, it is best to clearly indicate whether future capital contributions are voluntary or mandatory, when the contributions are due, and what rights the partnership has in collecting the amounts due. For example, will the defaulting partner’s interest in the partnership be substantially decreased if she cannot meet a required capital call or will she lose her partnership interest altogether? Now is the time to answer these questions.
Language related to partnership profit and loss allocations are the crux of any partnership agreement. Unless defined otherwise in the agreement, each partner is entitled to an equal share of partnership profits and losses are shared in the same proportion. You can get real fancy here, and most limited partnerships do so. I usually enlist the assistance of a certified public accountant at this point to ensure that tax requirements and investment goals are being met fairly, but the main goal is to ensure all of the partners are on the same page regarding expectations. Entire books have been written on this subject, so if you are planning on doing anything outside of equal sharing of profits and losses, strongly consider consulting a knowledgeable business attorney on the issue.
Deciding whether or not to get involved in a business partnership is never easy. At the end of the day, it often boils down to trusting your fellow partners and feeling comfortable with the group, as a whole. For these reasons, among others, partners usually prefer to keep a partnership closed to outside persons or businesses. To protect the integrity of the partnership, partnership agreements often either limit the rights of any transferee (an outsider who obtains the partnership interest of a partner), grant the partnership and/or existing partners a “right of first refusal” regarding the interest at issue, provide for the dissolution of the partnership upon a disallowed transfer, or require the affirmative vote of all remaining partners to authorize the transfer.
What each partner is allowed to do in relation to the partnership often depends on the type of partnership being formed. For example, in a limited partnership, limited partners risk their liability protection and any tax advantage by asserting too much control over the partnership. Aside from such statutory differences inherent in entity selection, partnerships can and often do appoint certain partners – a.k.a managing partners – to oversee the partnership’s day-to-day operations. This is one area where general partnerships have much flexibility and can go so far as to appoint different classes of general partners with different rights and duties as related to areas of expertise and partnership operations.
Professional Help With Partnership Agreements
Each Texas partnership is unique and most require a tailored partnership agreement to fully protect the persons involved and clearly lay out what is expected of each partner. If you are interested in forming a business partnership, you should contact a qualified partnership formation attorney to learn more about the various elements contained in partnership agreements and any exceptions that may apply in your case.