Equity Partnership Agreement: Everything You Need to Know
An equity partnership agreement is a legal document stating the rights and obligations of the partners in an equity partnership.3 min read
A partnership is a legal arrangement where two or more individuals agree to pool their financial and human resources for a business venture. Each partner is given a portion of the profits and losses of the business.
An equity partnership agreement is a legally binding agreement between the partners of a partnership that sets forth the rights and obligations of the partners and the proportion of their equity in the business. An equity partner owns part of the company and is entitled to a percentage of the partnership's profits. An equity partnership agreement should spell out the rights and obligations of all the partners in the partnership, including the equity partners.
Types of Partnership Agreements
Partnership agreements are of two types, including:
- General partnership: Here, each partner has personal and collective liability. In general partnerships, each partner is responsible for his liabilities and the liabilities of other partners in the business.
- Limited Liability Partnership: In this type of partnership, each partner's liability is restricted to the proportion of his or her investment in the company. Also, partners do not share the responsibilities of other partners.
A partnership agreement sets forth the status of the company as either a general or limited liability partnership.
Lockstep Partnership System
A lockstep partnership is a type of equity partnership where senior partners who have spent more years with the business receive a more substantial proportion of the business profits compared to new equity partners. However, the business community no longer favors the lockstep partnership system.
Critics of the system note that it discourages partners who are eager to earn more and lacks accountability. However, advocates of the system argue that it shields partners from loss of earnings and reduces internal competition.
Eat-What-You-Kill Partnership System
The Eat-What-You-Kill Partnership System is the second form of equity partnership. In this system, each partner gets a certain proportion of the company's profits, and individuals also receive compensation for their efforts towards running the business.
Supporters of the Eat-What-You-Kill Partnership System argue that it allows partners to have more control over their earnings and customers and enables them to have a clear understanding of what they must do to achieve their target income.