If you’re thinking of starting a real estate business and working alongside one or more partners, you’ve probably asked numerous “What happens if…” questions.
Thankfully, you’re not left without recourse.
Partnership agreements are designed to provide answers for such scenarios. They act as a roadmap giving direction on how issues are to be addressed in your business.
Here is a more in-depth definition of the term.
What is a partnership agreement?
Investopedia.com defines a partnership agreement as:
“…a legal document that dictates the way a business is run and details the relationship between each partner.”
What does this mean?
Partnership agreements contain rules surrounding how partners will conduct business, carry out management, handle profits and losses, as well as outlining their individual responsibilities.
It’s worth noting that partnership agreements go by different names including:
- Partnership contract
- General partnership agreement
- Business partnership agreement
- Articles of partnership
This brings us to the next point – the different types of partnership agreements you need to know.
The 3 types of partnership agreements
1. General partnership agreements
In this type of partnership, each partner has an equal share in the brokerage’s assets, liabilities, and profits.
2. Limited partnership agreements
In partnerships involving unequal capital investment, limited agreements exist to protect each partner. In limited partnerships, those with larger capital and asset investment are entitled to more profit as they also take on greater risk and liability than the other partners.
3. Limited liability partnership agreements
With limited liability agreements, partners share profits, assets, and liabilities equally with the only distinguishing feature being that each partner has limited personal liability.
Now, let’s take a look at the benefits of having a partnership agreement.
Advantages of a partnership agreement
There are numerous reasons why you need a partnership agreement. We’re going to outline three of the major benefits.
Benefit #1 Partnership agreements provide legal protection
Even if you’ve spoken at great lengths with your partner(s) and you feel that you see eye-to-eye on matters regarding the company, it’s never enough to simply end with a verbal agreement.
Having expectations written down will protect the business in the event of disagreements and misunderstandings.
Failure to have a partnership agreement may result in court mediation and because each state has its own legislation regarding partnerships, things may not always turn out as hoped.
Benefit #2 Partnership agreements dispel responsibility ambiguity
Sometimes partners may have a misunderstanding about roles and responsibilities. Partnership agreements serve to clear up any ambiguity about duties and expectations.
These agreements will also outline the course of action a partner is legally allowed to pursue when the other party is being negligent to the detriment of the entire company.
Benefit #3 Partnership agreements clearly define the purpose of the business
Partnership agreements will also clearly outline what the business is about and its objectives.
In this manner, there is no confusion about what exactly the brokerage is supposed to be doing. This makes running the business easier.
Do you want to talk to an expert about brokerage partnerships?
Real Estate Back Ops (REBO) is one of the Nation’s most reliable brokerage service providers. We assist with commission structure design, transaction management, valuations, growth through M&As, and ancillary revenue plans.
Contact us for more information.