A partnership agreement governs the relationship between two or more people who co-own a business. Without one, your state's default partnership laws apply — and those defaults rarely match what any specific partnership actually wants.
Why the defaults are dangerous
Most states follow the Uniform Partnership Act, which says:
- All partners share profits equally, regardless of contribution.
- Each partner can bind the entire partnership to contracts.
- Any partner can dissolve the partnership at any time.
- Partners owe each other a fiduciary duty.
These defaults are a recipe for disputes. A written agreement overrides them.
Core terms
- Capital contributions — what each partner puts in (cash, property, skills) and how that affects ownership.
- Profit and loss allocation — who gets what percentage, and when distributions happen.
- Decision-making — which decisions require unanimous consent, which need a majority, and who handles day-to-day operations.
- Management roles — who runs what. Specify authority levels to prevent unilateral decisions.
- Compensation — whether partners receive a salary or draw, and how it's taxed.
What happens when things change
- Partner departure — buyout terms, valuation method, and payment timeline. Without this, you're negotiating under pressure.
- New partner admission — who decides, and on what terms.
- Death or incapacity — does the partnership continue, or does it dissolve? A buy-sell agreement funded by life insurance is the cleanest solution.
The most important section of any partnership agreement is the exit clause. Most partnerships end because partners disagree — having a pre-negotiated exit plan prevents litigation.
Dispute resolution
- Mediation first — cheaper and faster than court.
- Arbitration — binding, private, and final. Include which state's laws govern.
- Forum selection — specify where disputes are heard to avoid multi-state litigation.
Make it legal
- All partners sign.
- Each partner keeps a signed copy.
- File with your state if required (some states require partnership registrations).
An expert-drafted partnership agreement tailored to your state takes about ten minutes.