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Partnership agreement: what is it & how to write one?
Learn how business partners should outline roles and responsibilities.
A partnership agreement makes 3 things clear
- Who owns how much of a business.
- Who’s responsible for day-to-day operations.
- What happens if a business changes or dissolves.
What is a partnership agreement?
Businesses thrive day to day because of relationships with clients, vendors, suppliers, and customers. The internal relationships between the business owners (who own parts of the company) and individual partners (who usually have business obligations in addition to ownership) are just as important. Those relationships inform how the business works at a high level, how profits and debts are distributed, and how the business will grow and allocate resources.
A business partnership agreements is primarily governed by the Uniform Partnership Act, which is applicable in 44 out of the 50 states and districts. Since its original enactment in 1917, this regulation has undergone several revisions and is often referred to as the Revised Uniform Partnership Act (RUPA).
The RUPA is particularly important when a partnership agreement lacks clarity, serving as a default legal framework for partnerships in states where it has been adopted. Familiarity with RUPA can be a valuable starting point for creating a partnership agreement tailored to your specific circumstances.
Partnership agreements are important because they act as a safeguard, ensuring that disputes can be resolved efficiently and fairly. They also provide guidance on the steps to take if partners decide to dissolve their working relationship or business. And now, it's easier than ever with help from AI Assistant, to share contracts for review, and request e-signatures in one app.
How to write a business partnership agreement
The best way to prepare a partnership agreement is to hire a reputable attorney who will help you find what you need and craft the specific kind of legal documents you require for your enterprise.
A business partnership agreement can cover a lot of ground, but there are a few steps you can follow in writing such an agreement:
1) Start with the partnership name.
Although it may seem obvious, one of the first agreements you and your partner(s) need to reach is the name of your business.
2) Specify the percentage of contributions and ownership.
Compile a list of the specific contributions each partner will make to the business. Additionally, you must determine the ownership percentages, typically based on the contributions made by each partner.
3) Detail the distribution of profits, losses, and draws.
You and your partner should agree on how to allocate the business’s profits, losses, and draws. Partners may choose to share these based on ownership percentages or distribute them equally, regardless of ownership stakes.
4) Define the partners' authority.
The partnership agreement should clearly define partnership authority, also known as binding power. This outlines which partner(s) can commit the business to debt or contractual obligations, minimizing unnecessary risk.
5) Consider the process for withdrawal or death of a partner.
Although it’s uncomfortable to think about, the partnership agreement should address the potential withdrawal or death of a partner. It should also detail the process for business valuation and any requirements for life insurance policies naming the other partner(s) as beneficiaries.
All partners in a business want to feel like they are treated fairly regarding their equity in the company, so there are certain clauses that most business partnership agreements include, such as:
Buyout and dissolution clause
No partnership is forever. People pass away, retire, or move on. When that happens, it’s time for the remaining partners or outside parties to buy the absent partner’s shares.
Every partnership agreement should have instructions about what to do in the event of the death of a partner, what triggers a buyout, whether or not non-partners can participate in a buyout, and how payments are distributed. Dissolution clauses can also include what happens to the partnership in the event of arbitration, e.g., bringing in a third party to help settle a dispute.
Non-compete clause
If a partner leaves, their former partners often won’t want them taking their knowledge, expertise, and inside information to the competition. Non-compete clauses prevent exactly that kind of exodus, and bar former partners from taking their talents elsewhere in the industry for a certain amount of time. Some state laws don’t allow noncompete clauses.
Non-disclosure clause
This clause prevents partners from revealing confidential information and trade secrets to outside parties. A non-disclosure clause is beneficial in a partnership agreement as it helps protect sensitive information shared between partners. By establishing clear boundaries regarding confidentiality, it ensures that proprietary business strategies, trade secrets, and other critical data remain secure. This fosters trust among partners, allowing them to share ideas freely without the fear of information being misused or disclosed to outsiders. Ultimately, a non-disclosure clause strengthens the partnership by promoting open communication while safeguarding the interests of the business.
Provisions for hiring and expansion
Businesses grow. A partnership agreement needs to have provisions for who can hire employees, whether or not all partners need to interview or approve of new team members, and how a business will expand. A partnership agreement should also outline how partners will hire contractors, manage freelancers, and handle relationships with vendors and suppliers. An agreement also needs to explain how new partners can potentially join the enterprise.
Insurance
Partnerships need to have appropriate and adequate insurance in the event of fires, theft, disaster, and anything else that could open them up to liability. Sometimes they also require life or disability insurance for partners or employees, depending on the type of business.
4 types of business partnerships.
Partnerships are almost always unique, and the specific terms vary. The laws of individual countries vary, but, broadly speaking, there are four major types of partnership agreements in the United States:
1. General partnerships
General partnerships are the most basic forms of partnership and one of the most common. All business partners in a general partnership have total liability, participate in managing the business, and have the ability to agree to business contracts and loans on behalf of the business. Ownership interests (i.e., how much of the business everyone owns) and profits in a general partnership are usually split unevenly, according to an agreement between the partners.
General partnerships are easy to form and dissolve. Much of the time, they dissolve automatically if one of the partners passes away or can no longer meet their financial obligations.
2. Limited partnerships
In a limited partnership (LP), some partners are general partners who are fully responsible for regular business activity. Other partners are limited partners. They provide capital contributions, but they’re not an active part of the business’s day-to-day operations or decision-making. An LP agreement will list who is who and make explicit the responsibilities of each partner.
3. Limited liability partnerships
Limited liability partnerships (LLPs) are less common than general or limited partnerships, and are not allowed in all states. In limited liability partnerships, partners are still responsible for regular business operations as well as debts and legal liabilities, i.e., responsibilities. However, they’re not responsible for errors made by other partners.
Limited liability partnerships are most common for specialized professional organizations. Doctors, lawyers, and accountants might all be members of a limited liability partnership arranged so that all members don’t have to be responsible for, as an example, bad business decisions or malpractice committed by one member.
4. Limited liability limited partnerships
Limited liability limited partnerships (LLLPs) are a newer type of partnership and not available in all states. For the most part, they operate like LPs but limit the general partners’ liability. Like in an LP, the general partners are fully responsible for the day-to-day running of the business, but they have liability protection just like the limited partners do.
Advantages and disadvantages of a partnership agreement.
Like with any typical contract, there are some advantages of drawing up a business partnership agreement and there could also be some disadvantages.
Advantages of a partnership.
Here are the 4 most common advantages of a partnership:
- Easy to establish and dissolve - setting up a partnership is simpler and more straightforward compared to other business structures. Once you draft a partnership agreement, all partners need to agree to its terms and sign the document, without the need to file extensive federal paperwork. In the same vein, dissolving a partnership is just as straightforward as establishing one. If all partners agree to dissolve the partnership amicably, you can refer to the dissolution clause in your partnership agreement and follow the outlined procedures. However, it's important to consult your state’s laws on partnership dissolutions, as you may need to file a statement of dissolution.
- Easy to file taxes - partnerships simplify tax obligations, as you do not have to file additional business entity taxes. Instead, the business's profits and losses pass through to the individual partners, meaning you will include your share in your personal income tax filings.
- Additional support and expertise - running a business requires wearing multiple hats, but having a partner allows you to cover more ground than if you were going solo. A business partner can bring unique expertise that complements your own, enhancing the overall capabilities of the company.
- Reduced financial burden - starting a business alone can be financially daunting, but having a partner can alleviate some of that strain. With a partner to share the startup costs, you may find it easier to invest more upfront or avoid accumulating significant debt.
Disadvantages of a partnership
There could also be disadvantages to a partnership, such as:
- Personal assets are at risk - in a partnership, personal assets are not protected and are not treated as separate from the business. Unlike other business structures, a partnership does not create a distinct legal entity. This means you are personally liable for any legal or financial challenges the business encounters, putting your personal assets at risk since they are not shielded by the partnership agreement.
- You share liability - as a partner, you are legally and financially accountable for both your partner's actions and the business itself. If your partner encounters legal issues, you may also face liability and potential legal consequences. This shared responsibility can strain your relationship with your partner and impact your personal finances.
- You have less independence - unless your partnership agreement explicitly states otherwise, your partner has equal authority in all business decisions. Disagreements over key decisions, such as expansion plans, hiring a management team, or selling the business, can lead to conflict, hinder professional growth, and potentially threaten the stability of the company.
- You share profits - while having a partner can help share the financial burden of running a business, it also means you will need to split the profits. If you have multiple partners, your profit margins may be significantly smaller than if you were running the business alone.
Get partnership agreements signed faster.
With Adobe Acrobat for business, everyone involved in a partnership can review and sign agreements fast.
Electronic signatures are a secure, legal, and efficient way to make sure every dotted line has the name it needs, and get business going quickly.
Plus, security measures — like password-protection for PDFs and identity authentication for signing — help keep documents secure so you can focus on running your business, and make your partnership flourish for everyone involved.
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