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What Is a Partnership Agreement?

A partnership agreement is an internal business contract that outlines specific business practices for the partners of a company. This document helps establish rules for how the partners will manage business responsibilities, ownership and investments, profits and losses, and company management. While the word partners often refer to two people, in this context there's no limit to how many partners can form a business partnership.

Partnership agreements go by different names depending on the state and industry in which they're formed. You might know partnership agreements as:

  • Articles of Partnership
  • Business Partnership Agreement
  • Creation of Partnership Agreement
  • Formation of Partnership Agreement
  • General Partnership Agreement
  • Partnership Contract

Partnership agreements help answer, "What happens if..." questions before they come up in practice to ensure the company runs smoothly. The three main types of partnership agreements are:

  • General: In a general partnership, all partners equally share liabilities, profits, and assets.
  • Limited: Limited partnerships protect partners who do not contribute capital equally. This way, the partner or partners who contribute the most money or assets earn the most profit and take on the most liability, while partners who contribute less in capital or assets earn less in profits and carry less liability.
  • Limited liability: Limited liability partnerships function much the same as general partnerships, but give the partners protection from the malpractice or negligence claims that may arise from their other partners. The distribution of shares in an LLP will depend on the partnership agreement.

Partnership agreements help establish clear boundaries and expectations regardless of whether your partnership is general, limited, or limited liability.

See Partnership Agreement Pricing by State

Benefits of a Partnership Agreement

Partnership agreements offer a host of benefits to those business owners who create one. A few of the most substantial benefits include:

  • Business outline The agreement delineates all the elements of the business and how the partners are to manage each, which helps reduce confusion once the business is running.
  • Clear responsibilities The partnership agreement clearly establishes personal responsibilities for each partner in terms of capital, profits, losses, and liabilities in addition to business management and oversight.
  • Form of mediation The primary benefit of a partnership agreement is in its ability to forestall future arguments. Since all expectations and responsibilities are outlined, all partners should know what they need to do to fulfill their duties.

Potential Consequences

When you start your business, the division of labor and resources between partners might seem obvious, so you might not think it's worthwhile to create a partnership agreement. Unfortunately, your business might suffer negative consequences in the future without one.

  • State law Every state has different laws governing partnerships. If you don't create an agreement, state law will automatically govern the future of your company in the case of a partner's death or another change to the partnership, regardless of your wishes or intent. The default provisions under state law may not always align with the wishes of the partners when it comes to business operations.
  • Disputes Disputes regarding the operation of the company could arise in the future. With no documentation outlining the goals, responsibilities, and expectations of the partners, the company could suffer.
  • Tax implications For those limited or limited liability partnerships, without a clear description of each partner's contributions, the state could assume each partner owns the same share of the company and tax them accordingly. It is worth noting that partnerships are pass-through entities, meaning the business itself is not subject to taxation. The profits and losses pass through to the individual partners who then report them on their personal tax return.

Elements of a Partnership Agreement

Most partnership agreements share some common elements. When you're drafting yours, ensure you include the following categories:

  • Name Include the name of your business.
  • Purpose Explain what your business does.
  • Partners' information Provide all partner's names and contact information.
  • Capital contributions Describe the capital (money, assets, tangible items, property, etc.) that each partner provided.
  • Ownership interest Offer the specific percentage of the company that each partner owns.
  • Profit and loss distribution Explain the percentage of profit and loss assigned to each partner and how the company will distribute revenue.
  • Management and voting Outline how the partners will manage the company by delineating individual responsibilities in addition to explaining decision-making and voting between partners.
  • Adding or removing partners Create specific guidelines for adding new partners, removing partners who want to leave, and removing partners who don't want to leave.
  • Dissolution Describe how you'll liquidate the business and share out any profits should the company dissolve.
  • Partnership tax elections Assign a partnership representative to manage all tax communications.
  • Death or disability Provide clear instructions for how each partner's ownership in the company should be liquidated or redistributed in the unlikely event of their death or disability.

When to Use a Partnership Agreement

Partnership agreements are for two or more people entering into a for-profit business relationship to use. Almost always, the partners establish a partnership agreement before going into business or just after establishing their company. In some cases, partners create partnership agreements after the fact to ensure everyone has a clear understanding of how the company operates, but it's best to have the agreement established and signed before opening your business's doors.

How to Write a Partnership Agreement

You have several options when establishing a partnership agreement. Since every state has its own laws governing formal business partnerships, you could start by reviewing the state's rules through your Department of State. Another option is to look for templates you can use to simply fill in or guide you as you structure your own partnership agreement. Finally, you can consult an attorney who specializes in contract law. Contract lawyers can help you create a custom partnership agreement.

Here is an article on how to write a partnership agreement.

Using an Attorney

Contract lawyers are your best course of action for establishing an effective partnership agreement. They'll know what's necessary to include for your state and industry and can help ensure that you've thought of and described every possible scenario and element for your business for the smoothest management experience.

Additionally, the use of an attorney ensures a mediating third party who can help ease any initial disagreements and maintain fairness within the contract. Contract attorneys are well-versed in writing legal documents, so they'll use specific language that will offer clear guidance later if needed rather than vague statements that might have seemed sufficient when originally written but are unclear years later.

Related Documents

Besides your partnership agreement, you might benefit from producing several other contractual business documents to ensure the smooth management of your company.

  • Business Sale Agreement If you're purchasing your business from someone else, this document outlines all the specifics of the sale.
  • Notice of Withdrawal from Partnership While this document might not get used or won't be used for some time, drafting a notice of withdrawal from partnership at the start of the business ensures all partners know what they'll need to do should they decide to exit the partnership.
  • Assignment of Partnership Interest This document outlines how to transfer partnership interest between business partners.
  • Partnership Amending Agreement Use this document to make any changes to the original partnership agreement.
  • Joint Venture Agreement This document outlines the specifics of how two or more people combined their assets or capital for a joint business venture.
  • Business Plan Use this internal document as a comprehensive guide on how the business will run, the specific departments, mission, goals, and more.

Partnership agreements are a necessary contract for any professional partnership. They help protect all partners financially and can ease any potential tensions throughout the life of the business. Consult with a lawyer to ensure your partnership agreement fully covers the elements of a partnership.

The Importance of Having a Partnership Agreement

Partnership agreements can resolve potential conflicts between partners. Disagreements may arise around issues, such as ownership division, roles and responsibilities, and asset division, without clearly defined terms and conditions.

Partners should enter into a formal agreement to ensure that both parties form and manage it correctly while avoiding partner conflicts. Disputes can result in expensive legal proceedings and unnecessary financial losses for all parties when contracts don’t address issues adequately.

Types of Partnerships

Partnerships are businesses with two or more business owners. Each partner contributes to the businesses’ financial or operational aspects in exchange for profit & loss (P&L). There are different types of partnerships to address the unique needs of your specific business situation.

There are four partnership types to consider:

  • General partnerships (GPs)
  • Limited liability partnerships (LLPs)
  • Limited partnerships (LPs)
  • Limited liability limited partnership (LLLPs)

Various provisions surround the partnership types. A contract lawyer will ensure that you walk away with an amicable agreement for your relationship, industry, company size, and business needs.

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Corporate Lawyer
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I am a corporate Attorney licensed in the state of Georgia and Ghana. My professional career started in 2016 as a litigator in a private law firm in Ghana. Subsequently in 2018, I moved in house to work for the University of Ghana and this is where my corporate transactional work experience began. Since coming to the US in 2019, I have gained significant transactional experience through internships at Verizon and Tricentis (a software testing company) during law school at UGA. Since graduating from UGA law school, I have worked as a corporate transactional attorney of an AmLaw 200 firm. In that role, I helped foreign companies entering the US market to establish a presence and comply with applicable corporate laws while doing business. I also assisted customers and service providers in the software and technology industry by reviewing SaaS and similar contracts. Also, I helped energy utilities in the renewable energy space navigate regulatory and policy issues and establish contractual business relationships through contract reviews.

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Partnership

Partnership Agreement

Texas

Asked on Nov 18, 2023

How to ensure clarity in a partnership agreement?

I am looking to form a partnership with another individual. We are both going to be investing in the same business and want to ensure that our interests are well protected. We have drafted a partnership agreement but are not sure if it is clear enough. We want to make sure that there are no misunderstandings between us and that our interests are clearly defined. We need help to make sure that the partnership agreement is clear and unambiguous.

Darryl S.

Answered Nov 28, 2023

Having an attorney review the current draft will provide an objective perspective on any gaps or areas lacking clarity in your agreement. Investing a little more upfront will prevent issues later should disputes arise. Please let me know if you need any other specific suggestions on strengthening your partnership agreement.

Read 1 attorney answer>

Corporate

Partnership Agreement

Tennessee

Asked on Oct 6, 2022

What is a limited partnership agreement?

Being asked to sign one and not sure what it is. I'm trying to create a partnership with a few of my colleagues and I'm concerned about the word 'limited'.

Michael S.

Answered Oct 25, 2022

We really need to know more about the business and how everyone envisions ownership in order to answer the question. In general (and this is very general - I am a PA lawyer, not Tennessee), a limited partnership is an entity through which a business or property is owned. In a limited partnership, you need to have a general partner (either one more individuals or entities) who essentially manage the entity, and also have liability for all liabilities of the general partnership. The limited partners invest in the entity, but have no liability for the entity's obligations.

Read 1 attorney answer>

Business

Partnership Agreement

New York

Asked on Nov 16, 2023

What's a buy-sell clause in a partnership agreement?

I am forming a partnership with a business partner and we are in the process of creating a partnership agreement. We understand the importance of having a buy-sell clause in the agreement and we want to make sure that our interests are protected in the event that one of us chooses to leave the partnership. We are looking for more information on what this clause should include and the legal implications of it.

Damien B.

Answered Nov 28, 2023

There are numerous variations of a buy-sell provision, clause or agreement. Generally, the provision is for one of the other owners (or the entity) to purchase the ownership interest of the one who has died or wants to leave the business. For example the parties enter into a buy/sell agreement to effect the purchase of the deceased partner's share upon such partner's death, to be funded by life insurance policies. There could also be an agreement for the entity itself to redeem the shares or membership interest depending on the type of entity Also, sometimes there is another type of triggering event other than an owner's death. Overall though, the buy/sell clause is a way to keep the ownership of the entity with the existing owners rather than having a third party become one of the owners of the business. So a buy-sell clause, provision or agreements alleviate the concern over what happens if a partner dies, leaves the business suddenly or retires.

Read 1 attorney answer>

Business Contracts

Partnership Agreement

New York

Asked on Mar 21, 2023

How to exit a general partnership?

I am currently a partner in a general partnership with another individual, but I have decided to leave the partnership for personal reasons. However, I am unsure of the legal steps required to properly exit the partnership, including the distribution of assets and liabilities. Therefore, I would like to seek the guidance of a lawyer to ensure that my exit from the partnership is handled properly and fairly.

Jane C.

Answered Mar 21, 2023

You need to review the partnership agreement to see the procedure for exiting the partnership. The partnership agreement will also address distributions.

Read 1 attorney answer>

Business

Partnership Agreement

New York

Asked on Nov 17, 2023

How is the partnership agreement enforced?

I am a co-owner of a small business with a partner. We recently created a partnership agreement to outline the roles and responsibilities of each partner. We have been in business for a few months now, but I am concerned that the agreement is not being consistently enforced. I am seeking legal advice on how to ensure that the partnership agreement is being adhered to.

Damien B.

Answered Nov 21, 2023

Hello! I understand you want to know how to enforce a partnership agreement. When a signatory/party to a partnership agreement violates any of the terms and conditions contained within the agreement, the other signatory or signatories to the agreement could allege breach of contract, including breaching the covenant to act in good faith. Generally also, court have found that there is a fiduciary relationship among partners. So, another potential claim could be a breach of fiduciary duty. Generally, prior to filing of any lawsuit, courts want to see that there was a good faith effort to resolves issues prior to the filing of a lawsuit. So, if there is a way to resolve the issue without the need for litigation that could save time and money.

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