Partnership Agreement Outline
How it works
A partnership agreement governs the rights, responsibilities, and profit-sharing arrangement between two or more partners in a general or limited partnership. The Partnership Agreement Outline generates a framework for documenting the core terms of a business partnership.
**Partnership types** General Partnership (GP): all partners are personally liable for partnership debts. No formal filing required in most states (but advisable). Partners are jointly and severally liable. Limited Partnership (LP): requires state filing; limited partners have liability protection up to their investment; general partner retains personal liability and management control. Limited Liability Partnership (LLP): available in most states for licensed professionals; provides personal liability protection for each partner's malpractice.
**Default rules without an agreement** UPA (Uniform Partnership Act): without an agreement, profits are split equally regardless of capital contribution; all partners have equal management rights; any partner can bind the partnership; dissolution requires unanimous consent. These defaults rarely match the partners' actual intent — a written agreement is essential.
**Key provisions** Partner names and contributions (cash, property, services); ownership percentages; profit and loss allocations; management authority and decision-making thresholds; partner roles and responsibilities; compensation (salaries or draws); banking and financial authority; admission of new partners; transfer restrictions; exit provisions (voluntary withdrawal, death, disability, retirement); dissolution process; dispute resolution.
**Tax treatment** Partnerships are pass-through entities — income is reported on partners' individual returns (Schedule K-1). Consider tax implications of special allocations (profit/loss shares that differ from ownership percentages) — they must have "substantial economic effect" to be respected for tax purposes.
This tool generates an outline. Have a licensed business attorney draft the final agreement.
Frequently Asked Questions
- General partnership (GP): all partners have equal management rights and equal unlimited personal liability for business debts. Simple to form (no state filing required in most states) but maximum liability exposure. Limited partnership (LP): has at least one general partner (unlimited liability, management control) and one or more limited partners (liability limited to their investment, no management role). LPs are used for investment funds and real estate. LLPs (limited liability partnerships) protect all partners from others' malpractice and are common for law and accounting firms.
- Capital contributions (how much each partner invests and in what form), profit and loss sharing ratios, management authority (who can make what decisions, spending limits without partner approval), partner compensation and draws, admission of new partners, transfer restrictions (can a partner sell their interest?), buyout/buy-sell provisions (what happens when a partner wants to leave or dies), dissolution procedures, and dispute resolution. The buy-sell provisions are often the most contentious and most important to get right.
- A buy-sell (or buyout) agreement governs what happens when a partner wants to exit: death, disability, retirement, voluntary departure, or forced removal. Without one, a partner's death could require liquidating the business or taking on the deceased's heirs as partners. Common structures: right of first refusal (remaining partners can buy at offered price), shotgun/Texas shootout (one partner sets price, other chooses to buy or sell at that price), and funded buyout (life insurance funds the purchase on death). Negotiate this when everyone is friendly — not during a dispute.
- No — partnerships can be formed by oral agreement or even conduct. But oral agreements are nearly impossible to prove and enforce. Disputes about profit sharing, management authority, and buyout terms are the most common causes of partnership litigation. A written agreement prevents these disputes and provides evidence if they occur anyway. Even for informal partnerships between friends or family, having a written agreement protects the relationship — most partnership disputes destroy personal relationships that would have survived with clear written terms.