Creating a Business Partnership Agreement 53

partnership agreement

If you and your partners don’t spell out your rights and responsibilities in a written partnership agreement, you’ll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes. In addition, without a written agreement saying otherwise, your state’s law will control many aspects of your business.

How a partnership agreement helps your business

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves and other important guidelines.

Uniform partnership act

Each state (with the exception of Louisiana) has its own laws governing partnerships, contained in what’s usually called “The Uniform Partnership Act” or “The Revised Uniform Partnership Act” — or, sometimes, the “UPA” or the “Revised UPA.” These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnership’s life unless you set out different rules in a written partnership agreement.

Don’t be tempted to leave the terms of your partnership up to these state laws. Because they were designed as one-size-fits-all fallback rules, they may not be helpful in your particular situation. It’s much better to put your agreement into a document that specifically sets out the points you and your partners have agreed on.

What to include in your partnership agreement

Here’s a list of the major areas that most partnership agreements cover. You and your partners-to-be should consider these issues before you put the terms in writing:

  • Name of the partnership. One of the first things you must do is agree on a name for your partnership. You can use your own last names, such as Smith & Wesson, or you can adopt and register a fictitious business name, such as Westside Home Repairs. If you choose a fictitious name, you must make sure that the name isn’t already in use.
  • Contributions to the partnership. It’s critical that you and your partners work out and record who’s going to contribute cash, property or services to the business before it opens — and what ownership percentage each partner will have. Disagreements over contributions have doomed many promising businesses.
  • Allocation of profits, losses and draws. Will profits and losses be allocated in proportion to a partner’s percentage interest in the business? And will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? You and your partners may have different ideas about how the money should be divided up and distributed, and each of you will have different financial needs, so this is an area to which you should pay particular attention.
  • Partners’ authority. Without an agreement to the contrary, any partner can bind the partnership without the consent of the other partners. If you want one or all of the partners to obtain the others’ consent before binding the partnership, you must make this clear in your partnership agreement.
  • Partnership decision-making. Although there’s no magic formula or language for divvying up decisions among partners, you’ll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision. Or if that leaves you feeling fettered, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these when setting up the decision-making process for your business.
  • Management duties. You might not want to make ironclad rules about every management detail, but you’d be wise to work out some guidelines in advance. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure you’ve got everything covered.
  • Admitting new partners. Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.
  • Withdrawal or death of a partner. At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should set up a reasonable buyout scheme in your partnership agreement. To learn more about this issue, read Plan for changes in partnership ownership with buy-sell provisions.
  • Resolving disputes. If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.

The Partnership Book, by attorneys Denis Clifford and Ralph Warner (Nolo), can help you think through the details and put them in writing.

  • Brent

    If you are not equal partners,say there are 3 partners,1 has 52% and the other 2 have 24% each. How are the bills divided? Does each partner pay his percentage of the bills,or is it an equal split still?

    Thank you

    Brent

  • anna

    if i will have business partner….when can we have our share?..is it when we see that our investment has come up?……

  • Muringo

    I would like to know how to do a business contract with a foreign supplier whom I don even know but have agreed to do business together.
    I am worried of sending my money to them as well.
    Kindly advise.

  • http://NOWEBSITE254-0721-511-336 ALBERT.O.ONDERI

    HI
    THANKS FOR YOUR SITE IT EDUCATE ALOT ,
    MY QUESTION IS THAT SUPPOSE I MANAGE ALL THE BUSINESS ACTIVITIES BUT MY PARTNER CONTIBUTE ONLY THE CAPITAL HOW ARE WE SUPPOSE TO SHARE PROFITS MADE FROM THE BUSINESS
    KIND REGARD

  • http://none vivian cook

    Albert, do you and your partner have a business plan? If so, is there a backup plan for hte business? Do you have a signed agreement among the twor of you. Remember that a certain amount of capitol is to pay employees expenses and equipment depeding on the kind of businessl Also capitol is called a debet in acounting. Make sure you have a journal, ledger and even a spreadsheet to keep up with the day to day process of your business, Accounting is difficult, so if you can not do it by yourself, get someone cettified to help with this issue. I know this did not answer your direct question, however i hope it helped some.

  • Raghunandan B L

    what are the pre conditions for becoming a sleeping partner.what are the percentage of share of profit,

  • janice

    Hello,
    I am in the process of doing up a business plan.
    I have a product that I would like to get on the market, the problem is: according to the laws in Florida you are not allowed to create any product that is eatable in your own home. I was told by the government that I can borrow a kitchen from an established liscensed resturant where I can use their license to produce and market my product…my question is: What kind of business plan do I need to do, and what are the specifics that I need to include to make this plan and business venture a success?

  • niki

    I am hoping to go into a partnership with a friend , he is putting mostly assets, and he owns the premises, i will have to put in what ever amount as capital i can afford, i’m sure the profits from the business will be shared according to different percentages of capital we put in? but i will be working in the business a take away, and he will not be running th businessbut will be just in and out as he lives out of the country? please advise what are the pros and cons and what I should look out for when we do the business agreement as to avoid any disagreements at a later stage? also as a partnership is it etter fro me to ask for a monthly salary, and then we can share profits at the end of the year? please advise

  • Barbara Foster

    When partners put in equal shares of money into a new business is this called
    equity?

  • JRB

    We have 3 people who are equal shares in a company but one of the partners does not want his name to show up on the paperwork with the state until he leaves his current employer. How do we do this and insure his ownership?

  • Akila

    Hi,

    There are 2 partners who contribute equal amount.After two months 3 partners join and they too contribute the same amount. Now in what ratio they should share the profit and losses

  • Hank

    I am looking at ways to get into a business partnership with my current employer, We started the business together 5 years ago with me as the employee, It has built up to employing 7 staff and large annual turnover.
    What ways can I look at to obtain a percentage of the business? I canafford to put capital in but the business probably doesn’t need that at the moment.
    I thought maybe looking at achieving certain budgets might then be a way of starting to receive a piece of the business and how whould I need to implement this

    Any ideas?

  • Anonymous

    I entered into an existing business as a partner earlier this year. At that time it was registered as a sole proprietorship and when I came on board it was re-registered as a partnership, however, we never signed the partnership agreement. We have now mutually decided to dissolve the partnership. Do I owe anything to this company? What rights do I have?

  • Terry

    Thanks for the info on your informative website. We have a Website based company that has been organically growing over three years now. There has been no capital investment to the company and all work was done for free on the basis of each person owning equity in the company when it makes profit or is sold. We don’t want to register the company as Limited company to avoid the incurring cost because we are not making any money as of yet. But we have a company who are interested in buying our business and now need to write up an agreement between the main equity holders that states what equity each person has in the company. Could any one please advise as to what sort of document would do the intended job. Very new to this situation so any help would be very much appreciated!

  • esing

    thanks for the info at your website .I have really learnt much, yet i wish to know how you can get into partnership with someone who alreaddy has a business and you want to start up yours which is similar to what the person has and the person wants to be a partner in your own business.

  • Jacques Kleyn

    I hadd a business idea and approachd somoene to go in with me on the business, we agreed on 51-49 but he insists on 50 50 now 2 moths later.

    Thw whole idea was mine, I think im intiteld to 51%, what are your openions?

  • Navid

    i would like to know if there are four partners with equal share of investment lets say $25000 each partner’s investment. two partners are working and two partners only invest capital.what would be their share in profit and loss of the business.and the share of working partner?

    pls send me the answer its urgent!

  • ROnaldo O. Niog

    HI

    My question is that suppose I manage the business activities but my partner contributes only the capital, how are we suppose to share profits made from the business?
    Thank you.. and best regards…

  • Gianni

    HI

    My question is that suppose I manage the business activities but my partner contributes only the capital,I mean we will both put the money together to open this small business but I will be the one to work days and nights and deal with customers, staff, vendors etc. how are we suppose to share profits made from the business?
    Thank you.. and best regards…

    ————-

    Gianni,

    I would suggest you look into something called “sweat equity“.

  • Alex

    Hi
    My question is a little complicated. I have gone into a partnership with a person that owns 3 other stores out right and partners with me in the 4th store. In simple terms I am 50/50 in the 4th store and have no investment in the other 3. There is no written agreement. We have been going 50/50 from day one. Now he wants me to pay him a franchise fee to buy him out. If i dont he wants me to stop using his trading name. Whats your thoughts on this?
    Regards
    Alex

  • naveen

    a friend of mine started a bussiness ,i would like to have partnership 50.50 with him by financing in the bussines.the bussiness license is in his name.
    i dont want to add my name in the license so that my company staff knows about our partnership.Is there any agrrement that i can prove i am the partner in this bussiness if anything wrong happens

    • http://www.businessingeneral.com Chelle Parmele

      Naveen,

      As it says in the article:

      If you and your partners don’t spell out your rights and responsibilities in a written partnership agreement, you’ll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes.

      For more in depth information, I would suggest visiting the Nolo.com website and searching their free articles for some more help. (Full disclosure – Nolo is a partner of Palo Alto Software)

      ‘Chelle Parmele
      Palo Alto Software

  • Brian

    I am starting a business with a partner. I am investing 100% and also know the business. My partner has the “business smarts” and he has proven himself throughout his career. He knows how to get a company to grow and become profitable. We will both earn an hourly rate while the company is trying to make a profit. My question is: How much of the profit should he receive?

  • dustin

    Does a partnership exist when only one partner contributes capital toward the start up and the other partner is only offering there services?

  • Confused

    If I only own 30% of the company, do I have to go half with all expenses?

    ——————
    It depends on how you own the 30% of the business. If it’s a general partnership the % of expenses that are yours depend on the agreement that’s in place.

    It also depends on how many other owners there are. A good place to get an in-depth answer tailored to your particular need is to contact a tax planner and make sure you understand everything about duties and responsibilities of your partnership.

  • shilpa ghare

    if there are 3 partners, two are working partner and one is givign money how should be devide the share?

  • Pingback: Partnerships, Sweat Equity, and The Social Network | Business in General

  • Irene

    Hello, My daughter and I are planning to start up a small business together. I believe we will be sucessful. However I am not sure how much I should expect out of the profit.

    I am the sole investor. My daughter has the buisness knowledge. How should it be divided?
    Thank you for any imput you might have for us.
    Irene

  • OKEKE CHIJIOKE

    I have the experience and will be running the biz on a day-to-day basis but my sleeping partner will contribute the funds. How do we share the profit?

    ————–
    From Buzzle.com

    “A silent partnership is just like a regular business partnership… It is extremely crucial for the people entering the partnership agreement to discuss and legalize the terms and conditions of their partnership beforehand in order to avoid future hassles and complications. ”

    In other words, go and see a lawyer! The lawyer will be able to help you and your partner discuss and decide on all the details about the division of work, profits and losses.

    Making sure everything is crystal clear from the very beginning will ensure there are no bad feelings or misunderstanding later down the line.

  • http://www.thedestroyers.co.uk dan

    Really great and useful article. This is going to form the agenda for my partnership meeting this weekend. Thanks :)

  • Yasin Abdullaziz

    It is becoming popular that experienced employees are leaving to start businesses with partners who put in cash only cash. How should ownership be and shares? And how should the experience and business ideas be recorded in the balance sheet?

  • http://www.yahoo.com Micheal Masind Lubeeko

    This is really a useful article. It is going to form the learning for my company Board meeting this month end. Thanks dear.

  • Steady T Jirira

    I love this, its going to be helpful in forming a new partnership with a friend soon.

  • http://www.callboxinc.com Belinda Summers

    Its good to have an agreement in business partnership.An agreement will allow you to establish a working relationship in a way that suits you, your partners and the business. It will give everyone a defined role and responsibilities and should deal with the process of what does happen if everyone does falls out. As there is no “one size fits all” agreement, here are some of the key areas that you should consider when you have an agreement drawn up:

  • http://www.callboxinc.com Belinda Summers

    Its good to have an agreement in business partnership.An agreement will allow you to establish a working relationship in a way that suits you, your partners and the business. It will give everyone a defined role and responsibilities and should deal with the process of what does happen if everyone does falls out. As there is no “one size fits all” agreement, here are some of the key areas that you should consider when you have an agreement drawn up: Name of partnership, contributions to the partnership,partnership decision-making and many more.

  • http://www.callboxinc.co.uk Oliver Scott

    It is simple to set up a partnership because no legal documents are needed. Partnerships are often an oral agreement between two or more parties. Potential problems can be averted down the road by drawing up a legal partnership agreement.

  • Yaa Kusi Binka

    I started the business as a sole proprietor a about 4 years ago, the business has gained some assets and market. Now i want to bring in a partner to expand the business and reduce my workload. how will profit/ loss be shared considering the situation. she is basically bringing in expertise while i provide the capital. Please reply ASAP. Thanks

    —-
    What you are talking about is called “sweat equity” and our founder Tim Berry has talked about this quite extensively. You can read about it on the Up and Running blog here: Ask the Expert – Sweat Equity

    I would also suggest you contact a lawyer and make sure your contract, who is bringing what to the table and what that looks like on paper and in profits, is clearly outlined.

  • CARES

    me and my frend started a bussiness but now my frend wants to include her partner how should we go about that

  • Anit

    I am willing to financially back my niece in starting a family diner. My other sister is going to be part of the business as well. My niece will be primary operator where my sister and I will be the go to person, bring supplies and help inside the diner when needed. Otherwise, we are supporting our niece in her dream. How do we divide the partnership?
    Thank you

    —-
    Go and talk to a lawyer. Even when it is family, you want to make sure everything is properly outlined and agreed to before hand. A good attorney will be able to explain and properly outline the options.

  • Pingback: Business legal agreement

  • Pingback: Business partnership agreement sample

  • Pingback: Business partnership contracts

  • Pingback: Business partnership contract template

  • chris

    i came here looking at ways to form a partnership with someone and it has helped a great deal. there are possible issues discussed here that i didnt think about.

    to some of you out there you have been asking about how much of the profits you get when you only invest money, this should be agreed before you give any money, if you both agree to go 50-50 then thats fine. when other people come in to the business after whether they put up £1000 or £100000 you should decide what their equity should be because that could be anywhere between 0.01% of the company to 100% it doesn’t matter. Equity should be agreed in advance so that everyone knows what percentage they are going to get. e.g. there are 5 people in a business, 2 own 25% each, another 2 own 20% each and the 5th person owns 10%. if the net profits for the year are £1000 then the 2 that own 25% each get £250, the 2 that own 20% get £200 each and the 5th person gets £100.

    with regards to how much your stake is in the company i cannot say, you have to decide with your partner(s). dont forget that money isnt the only issue particularly when you dont the leg work. often 50%, or 33.3% each if you have 3 people, is the easiest way to go. even if you split the profits equally its still possible to have 1 person be the main decision maker etc.

    if you’re going in as just an investor or occassional helper it probably isnt fair that you have an equal amount of equity. perhaps, depending on how much you assisst or contribute, you should accept 20% or 15% or less if you think you that might be too much for your role. and whatever you decide make sure everyone knows and have it put into your agreement. less stake in the business doesnt always have to mean less control as an investor you can still have your say because its your money you’re risking.

    i hope this helps some of you who are unsure what your stake in the business is, and helps those who are just starting out
    .

  • Brian

    My partner and I are in business together with a 5050 investment, but he has a full time job and I will be managing the business full time. How do we work out compensation for me re: salary etc. He is suggesting a % of profits but I disagree

  • dan

    i have a question, why would a corporation take out a loan , which they can go to the bank, and get .why go to all the trouble to fill out paperwork and have it recorded, if you own the business???

  • nifah

    what will happen if the partnership agreement is not there ?
    (i need answer fast )

  • Linda Shustek

    when does a partnership qualify as a small business

  • Bentley Ncube

    hi i have some bakery equipment and i am about to go into a partnership with someone who will be providing working capital and infrastructure. how best can i approach this

  • http://uggs-australia-sale-uk.co.uk min888

    Hiya, I am really glad I have found this info. Nowadays bloggers publish just about gossips and internet and this is actually frustrating. A good blog with interesting content, that is what I need. Thanks for keeping this site, Ill be visiting it. Do you do newsletters? Cant find it.

  • Christine

    Hi
    My name is Christine and my partner and I received a SBA loan. I’m Native American women owned business. I signed the loan agreement with my partner owning 51% of our business and he owning 49%. My question is since we been in business together he has been using our partnership business to run his other businesses. He actually uses our business to sale online, to run a real estate business, meaning he’s been purchasing property with his brothers and I have know part in it. He also works for a company using our partnership business. That part I guess I’m a little OK with, I’m just not so sure about the others businesses he is running out of our partnership business. We are not married and we have no agreement. Our partnership business pays for everything. He also works more on his other businesses versus our business. We have a retail store and requires a lot of work. I feel like I’m being used. And to top this message off we live together and been together in a relationship for 5 years. We have had issues about him running his other businesses out of our store but, always on way or another got through them however, I have sick feeling in my gut that I’m being used for his earned investments for his future while I keep on working my butt off with no earnings from our partnership business. I hope you can help because I really not sure what I should do.

  • http://www.partnership-agreement-template.com Business Agreement

    Very good article, many don’t realize how important the partnership agreement is in a business. Without one though, it’s so easy to disagree about many things such as expenses, salaries, capital improvements, paying bills, and rights of each partner. Some of the points made are worded very well, better than most other sources I’ve found. Thanks!

  • Pingback: How To Properly Structure Your Articles Every Time. | John's Internet Marketing Blog

  • http://www.indezoo.com/ Idris

    this is really helpful article….thank you for sharing!!!

  • http://www.agreements.org Agreement

    Creating a Business partnership agreement may not be simple. At the same time it is very essential to avoid disputes in future. It is well elaborated here in this article about various aspects.

  • Pingback: Exceptions to common small business marketing plans | Small Business Marketing Blog

  • http://WWW.PENTIMESCHOLARSHIPINTERNATIONAL.COM IBRAHIM MUHAMMAD ZAKARIYA

    I’M INTO A BUSINESS PARTNERSHIP THAT INVOLVED THREE PARTNERS INCLUDING MYSELF, I RECEIVE THE LEAST SHEARS, PROFITS, AND SALARY. YET I OVER THE DETAILS AND EVERY ASPECTS OF THE BUSINESS. HOW DO I STRUCTURE OUT A NEW PARTNERSHIP AGREEMENT TO TAKE THE BENEFIT OF RUNNING THE BUSINESS IN FULL-TIME?

  • http://www.finlandiagroup.blogspot.com/ Leonia Imatra

    Having partner in business is very important step on being successful.Understanding it in this article is really a great pleasure.

  • Beau Templeman2

    Once I have decided on the details of my partnership how do I go about making it legally binding?

  • alpha

    A partnership may benefit from the combination
    of complementary skills of two or more people. There is a wider pool of
    knowledge, skills and contacts

About the Author Nolo's mission is to make the legal system work for everyone -- not just lawyers. What we do: To help people handle their own everyday legal matters -- or learn enough about them to make working with a lawyer a more satisfying experience -- we publish reliable, plain-English books, software, forms and this website. Some… Read more »

How LivePlan makes your business more successful

LivePlan: Online Business Planning Software

If you're writing a business plan, you're in luck. Online business planning software makes it easier than ever before to put together a business plan for your business.

As you'll see in a moment, LivePlan is more than just business plan software, though. It's a knowledgable guide combined with a professional designer coupled with a financial wizard. It'll help you get over the three most common business hurdles with ease.

Let's take a look at those common hurdles, and see how producing a top-notch business plan sets your business up for success.

Click to continue
RATE THIS ARTICLE 1 Star2 Stars3 Stars4 Stars5 Stars
Loading ... Loading ...