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Equity Partnership Agreements

by Julie Rook

There are two types of partnership agreements. The first is a general partnership, which occurs when each partner is responsible for their own liabilities. Furthermore, each partner is liable for the losses of all other partners and could be held liable for the full amount of the partnership’s liabilities. The second type of partnership is a limited liability partnership, where each partner is only responsible for their own liabilities. Additionally, partners in a limited liability partnership are not responsible for the negligence or wrongdoing of the other partners. Whether a partnership is general or limited liability is set forth in the partnership agreement.

A lockstep partnership is one of two kinds of equity partnerships. In this partnership system, senior partners, who have been with the business longer, receive a higher share of the profits than a new equity partner. The lockstep partnership system, however, is becoming less popular in the business community. Critics argue that this system does not produce accountability and discourages energetic partners seeking higher salaries. Proponents of the system, though, note that the lockstep partnership system reduces internal competition and frees partners from the anxiety of how potential assignments or relocation will

affect their compensation.

The “eat-what-you-kill” system is the second type of equity partnership. While partners still share a specific proportion of the business’s profits, each partner is further rewarded for her individual effort. The proponents of this system note that an “eat-what-you-kill” partnership gives partners individual responsibility over their incomes and clients and lets them know what they must do to achieve the income they desire. However, because this system does not recognize non-billable time spent managing the business, it can produce a lack of management. Furthermore, there can also be a lack of training of new or junior employees, as such training is not rewarded under this system.

An equity partnership agreement should address the rights, responsibilities and obligations of each partner. The agreement should set forth the proportion of the profits to which each equity partner is entitled. Future partners should also allocate losses in their partnership agreement. In addition to allocating profits and losses, partnership agreements should set forth the business’s decision making process to facilitate business operations. Finally, the partnership agreement should account for the separation of the partnership, whether by death of a partner or a partner’s decision to leave. This is known as a buy-sell agreement.


Category: Small business

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