A limited partnership is a company that has at least one general partner and one or more limited partners. In this business structure, the general partner has unlimited liability while the limited partners. Liability is limited to their investment i.e., general partners are responsible for all debts. Also, the general partner manages the company while limited partners have no management responsibilities.
It is important to formalize a limited partnership for the following reasons:
- Agreed terms can be referred to when solving issues, thereby preventing conflicts
- It is a requirement by law to show compliance
- It defines the roles, rights, and responsibilities of the general and limited partners
- It highlights how profits, losses, and liabilities will be shared
- It addresses scenarios such as the death or departure of a partner by giving exit strategies
There are ready-made templates available that you can use to create a limited partnership agreement. Templates have benefits such as saving on time, flexibility, reducing legal costs by minimizing the need to consult legal experts, and efficiency.
What to Add to It
A limited partnership agreement template has components that make it structured and formal. The components are:
Names and roles
This is the first section of the template. Write the names of the general and limited partners and identify who is responsible for management, i.e., the general partner, and who are the passive partners, i.e., the limited partners.
Purpose
This is where you state the reason for the limited partnership agreement.
Capital contributions
Mention the amount each partner is investing. You can include timelines in case payments are made in installments.
Profit and loss distribution
Show how profits and losses will be shared among the partners. This is normally done by using percentages.
Management structure
State who manages the partnership, i.e., the general partner who will handle the day-to-day running of the business, and any decision-making limits of the limited partners (if any).
Duration and termination
Include the date when the partnership will start and the duration (whether fixed term or indefinite). You should also state the conditions for withdrawal or dissolution and how assets and liabilities will be handled thereafter.
Dispute resolution
Add a clause on how conflicts will be resolved. For example, arbitration, court, mediation, etc. Add the governing law, for example, NY law.
Amendments
State the process to be followed for making changes to the agreement. This usually requires written consent of all the partners.
Users of this Agreement
- Startups or small businesses – Entrepreneurs use a limited partnership agreement to manage roles, risk and investment among partners.
- Investors- They use the agreement to contribute to a business while avoiding liability to protect their assets.
- Lawyers and legal professionals – They prepare agreements for individuals entering into a limited partnership.
- Business consultants – They provide standardized templates to clients who want to establish limited partnerships.
Legal Worth of this Agreement
It is a legally binding document that is recognized and enforceable in courts. It is often used as evidence to solve disputes between partners. Also, courts use limited partnership agreements to uphold partnership rights and apply applicable laws. It is also important for parties involved to sign the agreement in front of witnesses to make it legally binding. Also, notarization is a requirement in some states in order to be registered and used in formal proceedings.
Differences between having a formal, verbal or no agreement:
| Formal agreement | Verbal agreement | No agreement | |
| Risk level | Low | High | Very high |
| Legal strength | High | Difficult to prove | No legal protection |
Free Agreement Template
You can access free and downloadable agreement templates that are ready to use, and you can customize them to suit your limited partnership agreements.
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Wrapping Up
A limited partnership agreement is an important document for individuals entering a limited partnership. It defines roles, how issues will be solved, how assets and liabilities will be distributed, and procedures to follow when the partnership comes to an end. It is also a requirement by law to have such an agreement to make it legally binding. In order to write this agreement, you will need a template that will make drafting easy.
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