Partnership Agreement Guide: Protect Your Business and Your Partner

Partnership Agreement Guide: Protect Your Business and Your Partner

Starting a business with a partner is exciting. You have complementary skills, shared ambitions, and mutual trust. The last thing on your mind is what happens when things go wrong. But the most important time to think about what happens if the partnership fails — is before you start.

Why You Need a Partnership Agreement

Without a written partnership agreement, your business operates under your state's default partnership laws. These default rules rarely match what the partners actually want — and can create catastrophic outcomes:

• Equal profit splits even when contributions are highly unequal
• Any partner can commit the business to contracts without others' consent
• Any partner can demand dissolution of the business at will
• No clear process when a partner wants to exit or buy out the other

Types of Business Partnerships

General Partnership (GP) All partners share equal management authority and equal liability for business debts. A bad decision by one partner binds all partners personally.

Limited Partnership (LP) Has at least one general partner (full management and liability) and one or more limited partners (investment only, no management role, liability limited to investment).

Limited Liability Partnership (LLP) All partners have limited liability — no partner is personally liable for another partner's malpractice or negligence (common in law and accounting firms).

LLC (Two-Member) While technically not a "partnership," a two-member LLC's operating agreement serves the same function as a partnership agreement and provides additional liability protection.

Core Elements Every Partnership Agreement Should Cover

Capital Contributions - How much each partner is contributing (cash, property, services) - What additional capital contributions may be required - Whether contributions earn "interest" before profit sharing

Profit and Loss Allocation - What percentage of profits and losses each partner receives - Whether There's a guaranteed payment to any partner regardless of profits - Timing of profit distributions

Management Authority and Voting - Who manages day-to-day operations - What decisions require unanimous consent vs. simple majority - Procedures for resolving management deadlocks

Partner Roles and Duties - What each partner is responsible for - Time commitment requirements - Restrictions on outside business activities (competition, moonlighting)

Adding New Partners - Process and requirements for admitting new partners - How existing ownership interests dilute

Transferring Ownership Interests - Right of first refusal (must existing partners be offered the interest before an outsider) - Buyout valuation methods - Restrictions on transferring interests to outsiders

Partner Exit (Retirement, Resignation, Death, Disability) - How a departing partner's interest is valued - Payment terms for buying out a departing partner - What happens if a partner dies

Dissolution - What events trigger dissolution - Liquidation procedures and asset distribution order - Who is responsible for winding down operations

The "Breakup" Provisions Are the Most Important

It might seem pessimistic to plan for the end of your partnership while you're still in the honeymoon phase. But these provisions are where partnerships fail most expensively. A partnership that generates $2 million in annual revenue with two equal partners and no dissolution procedure can result in years of litigation and the destruction of the business.

Decide now, while you still like each other: - If one partner wants out, what is the process? - How is the business valued for a buyout? - Can a partner be forced out? Under what circumstances? - What if you simply cannot agree on a strategic direction?

Use iRunDocs to create a comprehensive partnership agreement that protects both partners — covering all the provisions that matter most when things get complicated.