Write a Partnership Agreement

When you start a small business partnership, you should take time to write a partnership agreement. Outlining the details of the partnership can prevent future disagreements or lawsuits. The agreement can be as general or specific as you desire. However, a more detailed partnership agreement may prevent future disputes.

Steps

Preparing to Write the Agreement

1. Read the Uniform Partnership Act. In the absence of a partnership agreement, your state law will provide default rules that govern the partnership. The purpose of the partnership agreement is to replace these default rules with rules of your own choosing.
   • You can find a copy of your state’s partnership act by typing “Uniform Partnership Act” and your state into a web browser.
2. Meet with the other partners. One benefit of drafting a partnership agreement is that it encourages the members to think upfront about a variety of issues, such as the purpose of the partnership, its day-to-day operations, and what members want their own role to be in the partnership. Accordingly, it is a good idea to meet with all future members of the partnership and discuss the following:
   • Business purpose. What service will you be providing, and will the partnership eventually provide additional services or move into new areas of business altogether? How long do members anticipate the partnership operating for?
   • Business identity. What will the partnership be called?
   • Start-up capital. How much will it cost to get the partnership off the ground? Who will contribute what? Do people want to retain title to any real estate they contribute?
   • Allocation of profits. Will profits be divided equally? Or will they be divided according to the amounts of capital contributed? Do people want the ability to make monthly withdrawals to be deducted from annual profits?
   • Liability. Under state law, each individual partner is responsible for the debts of the partnership collectively. This means that, should the partnership owe money to a supplier or lose a lawsuit, any individual partner could be personally sued for the debt. Do partners want to limit their liability?
   • Decision-making authority. Who will run the day-to-day business operations? What decisions do people want to be involved in? Will people have assigned tasks, such as handling accounting or marketing?
   • Growth or dissolution. Do people foresee the ranks of the partnership growing? How will the partners decide on admitting new partners? How will the partners decide to dissolve the partnership?
3. Assign drafting to one person. For convenience, one person should take notes and then draft a preliminary Partnership Agreement. The person can then distribute drafts for comment and revision.
4. Consult with a lawyer. An experienced business attorney can help you identify areas of your partnership that need to be addressed in a partnership agreement. Even if you do not want to pay an attorney to draft the agreement, you could still sit down with the attorney and run through the general outlines of your partnership agreement.
   • The cost for an attorney to draft a partnership agreement is between $500-2,000, depending on complexity. By contrast, a half-hour consultation to talk about the business could cost $100 or so.
   • Some partnership provisions will require an attorney’s assistance. For example, if the partners want to allocate profits in a way that does not correspond to the ownership interest, then you will need a tax attorney.
   • An attorney can also help you clarify whether or not you really want to form a partnership. A key feature of partnerships is that each partner is personally liable for the debts of the partnership. If limiting liability is a concern for you, then your attorney may recommend that you form a limited liability company instead, or a limited liability partnership (if your state offers that as an option).

Identifying the Partnership

1. Title the document. You should begin the Partnership Agreement by identifying the document as such. At the top of the page, center the words “Partnership Agreement.”
2. List the partners and their residences. A partnership agreement should begin with the names of the partners and their willingness to be bound by the partnership agreement.
   • After listing the names of partners and their places of residence, identify how they will be referred to in the document. Type: “Hereinafter referred to collectively as ‘Partners.’”
   • State that they agree to the following terms and conditions: “The Partners agree as follows:”
3. Identify the type of business. Underneath the names of the partners, identify the type of business the partnership will be. For example, “The partners voluntarily associate themselves as partners to perform the general business of [insert business, e.g., “provide legal services” or “perform accountancy services”] and any other type of business from time to time as agreed to by the Partners.”
4. Provide a name for the partnership. Next, identify the name of the partnership: “The name of the Partnership shall be [insert name].”
   • Typically, partnerships use the names of the partners: “Smith, Jones, and Weston, Partners”.
   • You may also use a fictitious name. Be sure that the name has not already been taken. You should contact your county clerk’s office to check whether the name is already in use.
   • If you are registering as a Limited Liability Partnership, then contact your state filing office and ask how you can check if the name has already been taken.
5. State the place of business. An important piece of identifying information is the partnership’s location. Identify it using the following language: “The principal place of business of the Partnership shall be [insert location] and such other places as may be agreed upon by the partners.”
6. Identify the terms of existence. Here, you will identify when the partnership began and when it is scheduled to end. A partnership agreement does not need to list an expiration date.
   • You can type something like the following: “The Partnership shall commence on [insert date]. Unless terminated sooner pursuant to the provisions of this Agreement, the Partnership shall continue without defined term.”

Assigning Ownership Interests, Powers, and Duties

1. Enumerate the capital contributions of each partner. Partners often provide unequal resources at the start of a partnership. You should list the partners, the amount that each contributed, and the type of contribution (whether cash or property).
   • Include language like the following: “Each partner shall contribute to the Partnership an initial contribution of capital.” Then list each partner and specify how he or she will make the contribution.
     • For example: “Michael J. Smith. Capital contribution shall consist of cash in the amount of $50,000.”
     • Capital contributions can be made in cash, property, bonds, or securities.
   • The partnership agreement should document the cash, property, and services that each partner will contribute. Specify the types of contributions each partner makes. For example, “Partner 1 shall make a capital contribution of 10 acres of land. This land is valued at $50,000. An additional cash contribution of $10,000 will also be made by check.”
2. Identify partnership property. Property contributed to the partnership becomes the property of the partnership. Also, any property purchased by the partnership belongs to the partnership as well. You should specify this in your partnership agreement.
   • Use language like the following: “Unless provided otherwise by this agreement, all property paid to, brought into, or transferred to, the partnership or subsequently acquired by the partnership shall be partnership property. Unless otherwise provided, the title to all partnership property shall remain in the name of the partnership.”
   • You can also identify exceptions. Some partners may want to retain title to their property. You should state these exceptions. Identify the property, the name of the partner who owns the property, and the date that it will be returned to the partner.
     • For example: “It is agreed that the warehouse at 210 Rockwell Road is being made available to the partnership by Melissa Smith solely for the use of the partnership and is to remain the property of the lender. It shall be returned on January 1, 2020 or when the partnership is dissolved, if prior to that date.”
3. Decide how to allocate profits and losses. These can be based on the percentage of contribution to the startup of the partnership. However, you might want to use some other percentage. For example, a person may contribute a large sum of cash at startup but not do any work for the partnership. Accordingly, the partners may agree to allocate a smaller portion of the profits to this person.
   • You should list the partners and then their ownership percentage. Then state that profits will be distributed, and expenses assessed, according to this percentage: “Generally, gross cash distribution will be made in proportion to Partner’s percentages of partnership interest. Operating expenses will also be shared generally at the time those expenses are realized in proportion to Partners’ percentages of partnership interest.”
   • Also determine whether profits will be distributed once a year or whether each partner will be entitled to periodic draws (withdrawals). If you allow periodic draws, then state the amount that may be withdrawn. For example: “Unless and until modified by the unanimous written consent of the partners, [list partners who can withdraw] will be entitled to a monthly draw of $_____.”
   • Draws could also be calculated as a percentage of anticipated profits for that month.
4. Determine how the partnership will make business decisions. During the normal course of business, countless decisions will have to be made, big and small. The partnership agreement shall identify who can make those decisions.
   • You can agree to make all decisions by vote or empower each partner to make certain decisions. You can also blend these two options: state generally that management and operation will be by vote but then create specific job descriptions of partners.
   • Generally, you can state, “All decisions respecting the management, operation, and control of the Partnership shall be based upon a majority share of the partnership in favor of the decision.”
   • Then you can specify specific duties each partner will have. For example, a partner may be in control of marketing. You then can assign him or her power to make marketing decisions without needing the consent of the partnership as a whole.
   • You may also list matters that will require unanimity. Common matters requiring unanimity include assigning partnership property to creditors or others, submitting a partnership claim or liability to arbitration, suing the partnership, borrowing money in the name of the partnership, conveying partnership property, and transferring an individual interest in the partnership.
5. Clarify who can form contracts for the partnership. Absent an agreement to the contrary, any partner can bind the entire partnership to a contract or other agreement. You should therefore use the partnership agreement to clarify who has the authority to commit the business to contracts and other obligations.
   • For example, you could grant all partners the ability to form contracts under a certain dollar amount. For contracts over this amount, state that the partner must have the express written consent of all other partners.
6. Limit outside employment. You can also limit the work that each partner performs outside the partnership. You may want to clarify that the partners will not engage in business that conflicts with the partnership.
   • You can include language like this: “No partner, so long as this agreement is in force, shall pursue directly or indirectly any business or occupation which is in conflict with the partnership or which is in conflict with the partner’s duties to the partnership.”

Planning for the Partnership’s Future

1. Explain the process for admitting new partners. The language can be general. For example, “Additional partners may be admitted to the partnership on such terms as may be agreed upon in writing between the Partners and such new partners. The terms agreed upon shall constitute an amendment to this partnership agreement.”
2. Describe the process for a person to leave the business partnership. Partners may leave the partnership in several ways: by retiring, by withdrawing from the partnership, or by being expelled.
   • Provide mechanisms for retirement or withdrawal: “In the event any Partner shall desire to withdraw or retire, or becomes disabled to the extent that she or he is unable to fulfill necessary obligations to the partnership as outlined in this agreement, then such Partner shall give ____ days’ notice in writing, by registered or certified mail, to the other Partners. If any Partner is judged incompetent or insane, then his or her legal guardian shall provide notice in the same manner.”
   • Explain the grounds for removing a partner. List them individually.
     • Common grounds for expulsion include: failure to make a capital contribution; failure to fulfill an obligation under the agreement; disability; legal insanity or incompetency.
   • Also explain the process for how the partnership can expel the member. For example, “Upon a majority vote of the Partners, any Partner may be expelled from the membership in the Partnership upon the occurrence of any event listed in this section. The defaulting partner shall be provided ____ days’ notice of the expulsion.”
3. Provide instructions for dissolution. You must define when dissolution is triggered as well as what happens to the accumulated property and capital after dissolution.
   • For example, many partnerships dissolve when any of the following happen: a partner withdraws, retires, or is expelled; a partner dies or enters bankruptcy; a partner becomes incapacitated; all partners unanimously agree to dissolve.
   • Detail what happens at dissolution. For example, the remaining partners may elect to continue the business. You can list this as an option: “On dissolution, the remaining partners shall have the right to elect to continue business under the partnership name, by themselves, or with any new persons that they choose.”
   • Alternately, the partnership may be wound up and liquidated. Under this scenario, partnership assets are applied to liabilities owed to creditors and other partners. You should specify the order in which debts will be paid: typically creditors go first, then partners owed money for something other than capital contributions and profits (such as a personal loan); then partners for their capital contribution; and finally profits owed to partners.
4. Clarify what happens when a partner dies. Dissolution is often triggered by the death of a partner. However, partners often want to continue the partnership even if one dies. You should clarify what happens. Also specify how the partner’s estate will share in the net profits or losses.
   • For example, you could state, “Upon the death of a Partner, the Partnership shall not terminate, and the business of the Partnership shall be continued to the end of the fiscal year in which the death occurs. The estate of the deceased Partner shall share in the net profits or losses of the Partnership for the balance of the fiscal year. The estate of the deceased Partner shall have no voice in the affairs of the Partnership. At the end of the fiscal year, the surviving Partners shall have the option either to liquidate the Partnership or to purchase the interest of the deceased Partner.”
   • Clarify whether the vote to liquidate must be unanimous or by majority and when the vote must be taken. Under the Uniform Partnership Act, a partnership will be dissolved within 90 days of a partner’s death if a majority of surviving partners vote for dissolution.

Finalizing the Agreement

1. Pick which law governs the partnership agreement. Typically, it will be the law of the state you do business in. You may state, “This Agreement shall be controlled by and construed in accordance with the laws of the State of [insert state].”
2. State that the agreement is complete. You will want to include a “merger” clause which states that the agreement contains the entirety of what the partners agree to. This clause helps preempt a partner from later claiming that there were oral agreements between the partners that were not included in the agreement but which should be enforced.
   • Type: “This Agreement contains the entire understanding of the parties hereto and may not be modified or amended except by a writing signed by the parties.”
3. Include a signature block. Include space for partners to sign their names and write the date.
   • You may also want to get the agreement notarized. Not all states require notarization. However, having the agreement notarized can provide added protection in case a partner later claims that he or she didn’t understand or sign the document.
   • To have the document properly notarized, sign in front of a notary. Notaries can be found at most large banks but also at courthouses. Be sure to bring sufficient identification, such as a valid driver’s license or passport.
4. Distribute the draft to all partners. Once you have finished drafting the partnership agreement, share a copy with all partners and ask for feedback. If changes are minor, you can incorporate them into your master document.
   • Make sure changes are in Track Changes or in redline so that they stand out when you redistribute the draft.
   • If there are fundamental, major changes (such as ownership percentage), then you may need to call another meeting to work through the disagreements and hammer out a new draft.
   • If you find any member too difficult to work with during the drafting stage, you may want to reconsider forming a partnership with this person. Personalities and communication styles tend not to change simply because a business entity is formed. If you find someone difficult to work with now, you may want to bow out of the partnership altogether.
5. Get legal advice. If you didn’t meet with an attorney at the start of the process, then schedule a meeting with a business lawyer to go over the draft. The lawyer may identify ways to clarify language or identify areas you missed.
6. Schedule a meeting to sign. All partners should gather to read through the document together and then sign. Partners can make their capital contributions at that time.

Tips

• Your partnership contract should specify who holds the rights to any intellectual property created during the partnership.
• Hire an attorney to help draft the partnership agreement. An attorney can make sure all the partners understand the agreement.

Warnings

• Naming the partnership can become contentious. Partners may disagree on whose name or initials come first. Often, the partner who contributes the most to the partnership is named first.

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