What Is a Partnership Agreement? (And How To Create One)

By Indeed Editorial Team

Published August 4, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Business partnerships provide opportunities for owners to share responsibilities and unique contributions to help an organization grow. When starting a partnership, creating an agreement can help outline the terms and operational details that each partner can agree on. Learning about these written contracts can help you create an effective one and ensure you include the necessary terms and conditions. In this article, we discuss what a partnership agreement is, why they're important and share steps and tips you can follow when creating your own.

Related: Partnership vs. Sole Proprietorship: 3 Inherent Differences

What is a partnership agreement?

A partnership agreement is a written document created by two or more businesses or people when starting a business. This written contract includes several pieces of information, like what each partner's individual contributions might be and how they plan to make future business decisions. Here are some items commonly found in this agreement:

Contact information

This agreement can include basic contact information for the business partners and the business itself. You might include names, addresses, phone numbers and email addresses. This basic contact information can help legal officials contact you if there are any questions when you submit or file your agreement.

Related: 10 Pros and Cons of Being in a Business Partnership

Business information

There are several general details you might include about your business. This might include the name of your business and the type, such as a limited partnership or limited liability partnership. In this section, you can also briefly describe the business and provide information like when the business will start operating, how many employees you might have and what your expected revenue is. Here, you can also include tax responsibilities, like who's responsible for filing taxes and when your fiscal year is.

Partner details

More than contact information, the partnership details can outline what percentage of the business each partner owns. You might also include what initial contributions each might make and share if each partner has general ownership or if they're limited partners. In this section, you can describe how a partner may choose to exit a partnership or what you expect if one or more partners leave.

Related: Guide to Business Partnership Roles

Management information

Management information can include further details about the contributions and responsibilities of each partner. You might indicate the percentage of ongoing resources a partner might contribute and what the expected profit share can be. Consider detailing each's involvement in processes like hiring, training and other operational tasks to ensure the contributions match their expected return.

Voting details

As many partnerships share decision-making responsibilities, you can also include voting details. This means outlining how many votes you might need to agree on a decision or change the business. Consider having at least three voters for decisions to help avoid stalemates if two partners disagree. With voting information, you might also include a meeting schedule where you and your fellow partners meet to discuss business information, financial status and possible changes.

Related: What Is a Limited Partnership and How Does It Work?

Importance of a partnership agreement

There are several reasons creating an agreement with your partners is important:

  • Clarifying expectations: This agreement can clarify exactly what business owners might expect from the daily operations of their business. This can include specific responsibilities, employment information and how to handle unexpected scenarios.

  • Negotiating terms: Creating an agreement gives partners the opportunity to negotiate certain terms that work best for them. This can be especially important for identifying responsibilities and decision-making processes so each partner understands their role in the business.

  • Minimizing conflicts: A written agreement provides business owners with a document they can refer to later. This helps minimize any conflict or confusion about business plans, compensation or tax responsibilities.

How to create a partnership agreement

Here are some steps you can take when creating a partnership agreement:

1. Create a draft

You can create an early draft of your partnership terms and conditions when planning a new business venture. This might simply include a brainstorming list where you and your business partners write certain expectations and thoughts before confirming any of the details. You could use agreement templates to create a first draft of it in the proper format before clarifying the details, as you can find these online.

2. Define your terms

Once you create a draft, you can clarify the different terms of the agreement. This might mean including all information relevant to your business like partnership contributions, expected employment and tax information. When defining your terms, consider reviewing each with partners to negotiate any items before submitting to ensure each item is final.

3. Consult a legal professional

Though you might use a template for this agreement, consulting with a legal professional can ensure you include the appropriate information. Lawyers might specialize in specific business types can help you identify any potential gaps or inconsistencies that you can fix before submitting the agreement. Consider pursuing legal advice with professionals in your state, as they might know if there are any state or local requirements specific to your location.

4. Sign and file

Once you've created, revised and reviewed your agreement, you can sign it and file it. Each partner might sign the document and provide the signature date. This final step is the legal recognition for your partnership. You might print copies for each partner. In many states, you may need to file this with the government, ensuring you have the proper tax identification number and tax details needed to recognize your partnership as an official business.

Tips for creating a partnership agreement

Here are some tips you can use when creating this document:

  • Organize your business documents: Before creating a partnership agreement, you might organize each of your business documents, like business tax forms, previously signed contracts and owner documents. This can help you have the right information ready when preparing your partnership agreement and ensure everything matches.

  • Be specific: As this document contains the important details of your partnership, being specific can help you ensure legal compliance, minimize any potential edits and resolve any potential conflicts. Specific information on meetings, tax information, voting and responsibilities can provide a structure for when operating your business.

  • Revise drafts: Revising and negotiating can help you ensure everything is correct within the document. Consider proofreading for grammar, spelling and consistency, and revising your document to clarify any details you might want to consider before starting.

This article is for informational purposes only and is not intended to constitute legal advice; you should consult with an attorney for any legal issues you may be experiencing.

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