Last updated October 18, 2023
What is a Partnership Agreement?
A Partnership Agreement is a contract between two or more business partners. The partners use the agreement to outline their rights, responsibilities, and profit and loss distribution. The agreement also sets general partnership rules, like withdrawals, capital contributions, and financial reporting. LawDepot's template allows you to create a general partnership agreement.
A general partnership involves two or more general partners who have formed a business for profit. Each partner is equally liable for the debts and obligations of the company and the actions of the other partner(s).
A partner doesn’t need to be an individual. They can also be a corporation or another business entity. Specifying a partner’s legal status is important because it can have tax implications.
A Partnership Agreement is also known as a:
- General Partnership Agreement
- Partnership Contract
- Articles of Partnership
- Business Partnership Agreement
Who needs a Partnership Agreement?
Any two or more people who run a for-profit business together, including family, spouses, friends, or colleagues, should have a Partnership Agreement.
A Partnership Agreement sets out guidelines and rules for business partners to follow to avoid disagreements or issues in the future.
Why is having a Partnership Agreement valuable?
This contract is valuable because it sets out each partner's rights and responsibilities. Further, it allows the partners to customize the law as it applies to their partnership.
Although it's perfectly legal not to have a Partnership Agreement, they come with their advantages. Without an agreement in place, your business is subject to the standard statutes on partnerships in your state. In the United States, 37 states follow the Revised Uniform Partnership Act, and it might have provisions that aren't suitable for your particular partnership or business. By creating your own agreement, you take control of the specifics and customize the applicable law to suit your company perfectly.
For example, a partner leaving the company will cause the dissolution (or end) of the partnership in some states. With a customized Partnership Agreement, you can include clauses to ensure the default rule doesn't apply to your partnership. Instead, you can make it possible for the remaining partners to buy out the exiting partner's interest in the partnership.
What should I include in a Partnership Agreement?
Before you begin creating your Partnership Agreement, there are some crucial details about the partnership to sort out with your partners.
Have details regarding the following topics on hand when creating your document:
- Capital contributions
- Profit and loss distribution
- Management and voting
- Partnership tax elections
- Partnership withdrawal
- Partnership dissolution
How do I create a Partnership Agreement?
Business relationships are complex and require meaningful consideration. In fact, you might draft several versions of a contract before the partners finally agree to sign.
To help you cover all the bases, we’ve broken down this process into five easily digestible sections so you can create your Partnership Agreement at your own pace.
While our questionnaire walks you through these sections step-by-step, here’s a rough outline of the information you’ll need to prepare.
1. Provide partnership details
Start by specifying the industry you're in and what type of business you’ll run. Our template lets you pick from various industries, including:
- Entertainment and recreation
- Transportation and logistics
- Farming and agriculture
- Construction and repair
- Professional services
- Health and wellness
- Real estate
- Retail
Describe your business type by explaining the service you’re providing (e.g., bookkeeping, clothing store, dine-in restaurant).
Other partnership details you’ll need to include are:
- Your place of business: Different states have varying rules and regulations for partnerships. Select the state you're operating in, and we’ll customize your document to meet its requirements.
- Your partnership’s address: This is usually the location of your business’ main office or headquarters. You can use one of the partners’ home addresses if your business doesn’t have a premises.
- When the partnership begins: Pick a date for the partnership to start (if it started in the past, and partners are only now writing an agreement, our questionnaire lets you choose a past date). If you know when the partnership will end, you can also enter an end date.
- Your business name: Business name registration laws prohibit businesses from having similar names because it can confuse customers. You’ll need to carry out a business name search in your state to choose a suitable and available name.
2. Detail the capital contributions of each partner
Start with the name and address of each partner. Any business entity can become a partner in a partnership. This affects how the partnership agreement is signed, and it may have tax implications. So, you must indicate whether each partner is an individual, partnership, trust or LLC, or a corporation.
Then, specify the monetary value of the capital contribution each partner will make and the date that initial contributions are due. Capital contributions are the amount of time, money or assets each partner gives to the business or partnership. You can include non-monetary contributions, as long as the partners can calculate and agree on their value.
At the outset, it’s important to record what each partner is bringing to the table. This will also have a bearing on who gets what when the partnership ceases doing business.
Next, decide what the partnership rules are in key situations which are likely to arise during the lifetime of the partnership. For example:
- Decide if the partnership will allow new members. If admitting new members is a possibility you want to allow, our template gives you the option of a majority vote or a unanimous vote of the partners.
- Specify notice periods on withdrawal. A partner may make an “amicable exit” as long as they provide an agreed period of notice using a Partnership Withdrawal form. Long notice periods are needed so that the partnership can properly prepare for the partner’s departure. A withdrawal can have huge consequences for the business, especially in a small partnership. You can also decide if a partner leaving automatically causes the partnership’s dissolution. If there are only two partners, dissolution will be the only option if one partner leaves.
- Set terms for voluntary dissolution. This is a significant decision that may have varying consequences for each partner. As such, it’s a best practice to require a unanimous vote to dissolve the partnership. Dissolution can also be involuntary, where there are only two partners and one of them dies, for example. Some of the most common reasons a partnership may need to be dissolved include:
- All partners agree on a specified end date for their partnership
- The partnership completed all its projects or fulfilled its purpose
- The bankruptcy of a partner or the partnership
- A partner withdraws from the partnership
- The business is no longer profitable
- The death of a partner
When dissolving a partnership, you must first pay creditors. Then, the remaining partnership assets are divided amongst the partners or their next of kin (as the case may be in accordance with the rules set out in the Partnership Agreement). The options for distributing assets among the general partners are:
- Equal shares for each partner
- In proportion to capital contributions
- Fixed percent
3. Outline management responsibilities
It’s crucial to set rules for calling partners meetings, which is when the members come together to make critical business and financial decisions.
Decide if the partners will hold meetings weekly, monthly, quarterly, annually, or as required. You’ll also need to determine if any partner can call special meetings, or if those meetings require a majority of partners. The bigger the partnership, the greater the need for formal, scheduled meetings.
Next, decide if you want to appoint a managing partner to be responsible for the overall management and day-to-day operations of the partnership. Don’t forget: certain matters will still require a partners' vote, even if the partners appoint a managing partner. The managing partner is also someone who has an ownership interest in the partnership.
Some businesses decide to appoint a single managing partner, but others have all partners participate in daily operations. If a managing partner will be appointed, you should consider how to remove them from their position (e.g., unanimous or majority vote) if necessary.
Partners are jointly liable for decisions made on behalf of the partnership, even if they weren’t involved or consulted. Some decisions can change the nature of your business, bringing an unanticipated risk to partners that aren’t as financially secure as the others. As such, it’s essential to outline decision-making processes such as:
- Voting methods: When making decisions with a vote, you can give some partners more power than others. Determine if voting power is based on a partner's proportion of aggregate capital contributions, the proportion of profit shares, or if they'll all have equal voting power (one partner, one vote).
- Signing authority: Any person who has the authority to sign contracts on the partnership's behalf can significantly impact your business and the rest of the partners. Decide if the authority to sign contracts will be given to any partner, a managing partner, or subject to a partnership vote. The partnership must communicate any variation to the presumed authority of the partners to third parties, vendors, and business associates.
- Decisions that require unanimous consent: Some decisions involve significant new risks for a partnership. So it’s sometimes appropriate to require the consent of all partners to protect everyone’s interests. For example, you might require unanimous consent when:
- Hiring new employees where salary is over a certain amount
- Selling a partnership asset over a particular value
- Incurring new expenses over a certain amount
- Assuming new debts over a certain amount
- Assigning company check signatories
- Releasing partnership claims except for payment in full
- Making decisions that involve the unusual use or lending of partnership equipment
- Firing employees
4. Prepare for accounting
To prepare for accounting, you’ll need to consider how the partnership will make certain financial decisions. For example, you must determine:
- If the partnership will make financial decisions unanimously or by majority vote.
- Whether you will distribute the profits and losses equally, by fixed percentages, or in proportion to capital contributions.
- If partners will receive compensation for services rendered to the partnership (this would be in addition to the regular personal cash withdrawals that partners can take from the partnership's profits).
Next, address tax elections. Of course, taxes can get complicated, so you may wish to speak to a professional for advice on your situation.
But we’ll give you a brief overview of what you should know about partnerships and taxes.
The first thing to note is that most partnerships are considered pass-through entities when it comes to taxation. While a corporation must pay corporate taxes before the shareholders get dividends, in a partnership, each share of profits passes through the partnership to the corresponding partner (who gets taxed on their partnership income on their personal tax return).
However, federal tax audit rules allow the Internal Revenue Service (IRS) to treat partnerships as taxable entities in their audits instead of conducting individual audits of the partners. The application of these rules depends on the partnership's size and structure.
Partnerships that have 100 or fewer partners and are not multi-tiered (i.e., have no partners that are themselves partnerships, LLCs, or trusts) are eligible to elect out of the application of the rules on an annual basis partnership return.
Partnership agreements should decide on a federal audit policy. If the partnership chooses not to elect out or is ineligible to do so, it will need to choose someone for the role of partnership representative. The partnership representative serves as the IRS's point of contact under the new tax rules.
Law Depot's Partnership Agreement explains the rules clearly and allows you to:
- If eligible, choose whether the partnership wishes to elect out of the new tax elections. If the partnership elects out, they must renew this decision annually when filing tax returns.
- Make the partnership representative answerable to the partners in their dealings with the IRS.
- Elect to have each partner individually assessed for their share of the tax liability if an audit assesses a tax liability at the partnership level.
5. Add final details
A time may eventually come when partners clash with each other. To help avoid costly litigation, you may wish to have a plan for handling disputes in your Partnership Agreement.
What’s more, you may need to add a clause that’s specific to your situation and not covered by the template. If so, we’ll give you tips on how to write extra terms or information into the document.
You can also ask a lawyer to review your contract after you’ve drafted it for extra peace of mind.
Can I change or modify a Partnership Agreement?
Yes, it’s sometimes necessary to update the partnership agreement. A Partnership Agreement can be changed or modified at any time with the unanimous agreement of the partners.
