How to Prepare a Partnership Agreement

By Tom Speranza, J.D.

How to Prepare a Partnership Agreement

By Tom Speranza, J.D.

A partnership forms when two or more people launch a business or when a sole proprietor adds another owner or investor. It doesn't matter whether the business is a corporation, limited liability company (LLC), or partnership from a legal standpoint. Once you have more than one person involved, you need to resolve questions about how the business relationship among the owners will work.

Clipboard with a document labeled "Partnership Agreement"

The agreement should cover the following major topics. The owners need to meet, discuss, and reach an agreement on all of them and then draft a contract that accurately reflects the agreed-upon terms. Follow these steps when drafting your partnership agreement.

1. Identify ownership percentages.

The most basic issue is how much of the company each person owns. If each person contributes equal amounts of money and labor, the decision may be easy. However, in many cases, they each bring a different mix of financial resources and ability or willingness to work in the business. In that situation, the partners need to decide what relative values to assign and then divide up the business accordingly.

2. Raise capital.

Every business needs money, and in an ideal situation, it eventually generates enough income to both pay the bills and provide a profit to the owners. But they must first figure out how they can get the funds needed to cover the company's startup costs and pay business expenses until the venture is profitable.

The obligation to contribute capital doesn't have to reflect the ownership, but it often does. It is also very common for some partners to be financial contributors while others work for the business instead of contributing actual funds. They can sometimes resolve capital contribution issues by agreeing that those who contribute money get their contributions returned before distributions go to the others.

3. Decide who handles day-to-day operations.

A partnership agreement should state who runs the business on a day-to-day basis and the scope of their authority. For example, can each of them hire employees, purchase supplies, and sign contracts, or are those powers reserved to certain people? Does each partner have authority up to a certain dollar amount, after which the others get to weigh in?

4. Decide who makes major decisions.

Closely related to the issue of who runs the business is the list of decisions that an officer or manager of the business cannot make without seeking input or a formal approval from the partners. For example, they should agree upon who can decide to:

  • Call for additional capital contributions
  • Borrow money
  • Admit new partners
  • Hire or terminate employees or contractors
  • Sign contracts
  • Change the nature of the business
  • Sell the business
  • File for bankruptcy
  • Wind up and close the business
  • Engage lawyers or accountants

5. Describe how to handle transfers of ownership.

In a closely held business, each partner understandably wants some control over who they choose as co-owners. For that reason, most agreements contain detailed procedures about when and how they can transfer their interest. They should discuss and resolve what should happen if one of them:

  • Dies or becomes disabled
  • Wants to sell all or part of their ownership interest to a third party
  • Wants to transfer interest to another company, to a trust, or to a relative (a child or spouse, for example) for estate or financial planning purposes

6. Explain how to resolve disputes.

A small business is in real danger if the partners get into a dispute about running the company or deadlock over a major decision. For example, if the company desperately needs money and they fight over whether to contribute more capital or take out a bank loan, the business could fail while they dither over a solution. A well-drafted partnership agreement should contain a procedure for resolving disputes—preferably one that avoids expensive, lengthy litigation in court.

If you are ready to form your partnership, sit down with the others involved and determine what processes should be detailed in the agreement. The more information you include, the better so that you can avoid potential legal issues among yourselves at any given time.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.