Each of us has our own built in dictionary for terms we hear in our business lives. I find it fascinating that the standard business term ‘Equity’ is interpreted differently within the business world. I often interpret the term using the Internal Revenue Service definition because my background is in taxation. Lawyers use this term to mean ownership and not necessarily financial driven. Bankers convert this term to capital and the associated relationships to debt. Brokers, use the Securities and Exchange Commission definition and its relationship to the open large stock markets. Insurance defines this term in an individual’s overall assets less actual and unseen liabilities. Ask six different businessmen, you’ll get eight different answers.
This is why it is important to have a terminology section in every contract and agreement. This section should be up front on page one or two before getting into the nitty-gritty stuff of the agreement. In effect, it should be Article II in every agreement. Straight forward: Article II – Terminology and Definitions.
The following are common terms and the associated definitions used in partnership agreements. There are times when the term may take on two different meanings so make sure that both meanings are identified up front and when used in the agreement, note which definition is intended. The easiest format is to label each term ‘Section 2.X’ in sequential order based on the alphabetical spelling of the term.
Accounting Terms – similar to the acronyms section above, list the accounting terms and the associated meanings, and reference Generally Accepted Accounting Principles as the primary guidance. The following are examples:
- Distributions – cash or other property, from any source, distributed to either the General or Limited Partner by the Operating Partnership as defined by the Internal Revenue Code and Regulations.
- Capital Accounts – book balances and tax balances as defined by the Internal Revenue Code and Generally Accepted Accounting Principles.
- Recourse – debt and/or loans; the right of the lender to have on file a guarantee of repayment by the General Partner(s) and/or Limited Partner(s).
- Retained Earnings – as defined by the Internal Revenue Code.
Acronyms – list the acronyms used in this Agreement, like the following examples:
- IRS – Internal Revenue Service
- GADR – Georgia Department of Revenue
- DOE – Department of Energy
- COA – Commissioner of Accounts
- JD – Jurist Doctorate
- § – Section
- GAAP – Generally Accepted Accounting Principles
Affiliate – any individual, officer, director, or employee associated with the General Partner(s), or any person, legal entity, directly or indirectly controlled by the General Partner(s); or any partnership (other than this Partnership) of which one or more of the General Partner(s) serves as a general or has a limited partner interest.
Agreement – shall mean this ‘PLACE TITLE OF THIS AGREEMENT/CONTRACT HERE’ and any amendments, attachments, schedules and successors in the future. Some states require a Certificate be on file with the Secretary of State or with the local circuit court.
Code – a) Internal Revenue Code, b) Uniform Partnership Act, c) Uniform Limited Partnership Act; identify that the term refers to any amended information or superseded law or comparable law in the future.
Draw – taking of cash or property during an interim accounting period prior to reclassification as distributions for accounting and tax purposes. Draws are restricted to the General Partner(s) as approved by the Managing Partner or Partner in Charge.
Entity – shall mean any individual, corporation, general or limited partnership, limited liability company, trust, estate, non-stock company or any other legal entity as recognized by any state or federal authority.
General Partner – identify the current General Partner(s) of this operating agreement or limited partnership agreement whichever is applicable and any successor General Partner admitted pursuant to this Agreement.
Government Agencies – just as in Article I, you should identify those governmental agencies this partnership will interact with on a regular basis. Separate out via a list the Federal, State, Regional, Local, Licensing, and Regulatory Agencies your partnership will interact with or conduct business with in the future.
Jurisdiction – identify the local jurisdiction for control within the state. Often any legal documents must be file with the clerk of the circuit court. Jurisdiction can also be monitored or controlled at the state level, be sure to identify which authority controls and maintains the respective documentation.
Management Committee – refers to the committee as described in Section X.X.
Operating Partnership – name of the partnership as identified in Article I. In addition, describe the goal of the partnership.
Partnership Interests – describe the actual interest held by each party, i.e. the limited partner shall mean the right of the partner to participate in the profits, losses, deductions and credits as defined in this Agreement.
Uniform Act – shall mean the Uniform Partnership Act or the Uniform Limited Partnership Act as promulgated by the State of _________ or other provisions or statue(s) as may be enacted in the future, supersede or replace such Act.
There are many more terms used in partnership agreements. Identify those terms used more than once throughout multiple sections of the Agreement and insert them into Section II and define them. Sometimes, all you have to do is refer to another Section of the Agreement as it may be defined there. See my example of Management Committee above. Act on Knowledge.
This article is the second in a series related to drafting partnership agreements. The first: An Introduction to Partnership Agreements describes partnership agreements and how Article I is drafted. If you need a better understanding of partnerships, then I suggest reading The Basic Principles of a Partnership.