What is a partnership agreement, and why does it matter?

By Indeed Editorial Team

Published 7 June 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.

A partnership agreement is a legal document created for two or more professional parties that have entered a business partnership together. Although it's not compulsory to create an agreement, it can be helpful when dealing with financial, legal or leadership matters. These agreements are appropriate for companies and businesses of all sizes. In this article, we discuss what a partnership agreement is, discover the benefits of creating one, and provide a template to help you craft your own agreement.

What is a partnership agreement?

A partnership agreement is a contract that specifies the business practices and expectations for those individuals or corporations that have a stake in a company. The agreement establishes the rules and responsibilities of partners individually and in relation to the other parties. Details within the agreement may include investments, ownership, profits, losses and management of the company.

What are the benefits of creating a partnership agreement?

Creating a written agreement can help settle questions or disputes about business proceedings among those with controlling interests in the organisation. As of December 2021, there is no legal requirement for a business to have an agreement for its controlling members. It's advisable to create one because it protects partners from misunderstandings and is an explicit statement of roles and purposes within the business. Consider additional advantages, such as:

  • Choosing your own terms of the partnership

  • Distributing responsibility based on ability

  • Setting financial contribution expectations for each party

  • Deciding which parties have business decision approval

  • Outlining the levels of power and management duties

  • Establishing voting rights or other rights among partners

  • Creating contingency plans for money-related issues or questions

  • Setting fair exit strategy procedures for parties that may choose to leave the partnership

  • Drafting a plan to dissolve the business and establish who can make that decision

  • Outlining activities to avoid legal intervention, such as staging mediation sessions during a dispute

  • Creating a pathway to invite and accept new partners who might invest in the company

Creating a partnership within a business means you have parties in the company with unique skill sets, contacts, experience and information specialities that can aid the advancement of the organisation over time. Partnerships may provide more moral support among owners when making business decisions and create a stronger management team.

Related: What are partnership benefits? (With pros and cons)

What happens if I don't create a partnership agreement?

As of December 2021, if you don't create an agreement, the Partnership Act 1890 requires the equal division of all rights and responsibilities equally among the partners in the business. Some companies may draw up informal agreements to establish their partnership but these do not negate the information in the legal act. Therefore, you may prefer to formalise your business agreement to operate under your own rules and specifications within your company.

Related: Guide: What Is a Non-Compete Agreement?

What can you include in a partnership agreement?

When drafting your agreement, discuss it thoroughly with all partners first and include all the important details in the document. Agreements may differ in their exact wording, depending on the aims, objectives, division of assets and items included. Some elements to add to your agreement include:

  • Company name

  • Company address

  • Outline of business goals and objectives

  • Business statement of purpose

  • Individual partner's names

  • Individual partner's contact information, including phone numbers and email addresses

  • Percentage stake of the company for each partner

  • Details of the collateral and offerings from each partner, including money and property assets

  • Percentage of profit-and-loss expectations for each partner

  • Distribution of company revenue per partner or area of business

  • Management summary for each partner and stake in the decision-making process

  • Guidelines for adding and removing partners from the agreement

  • Liquidation plans and profit-sharing among partners

  • Tax filing procedures among partners

  • Instructions for share redistribution of a particular partner's ownership in the event of liquidation or death

Be sure to include any additional details that you consider relevant to your company. Consult a solicitor for more information about covering all the important details of the agreement. Store the agreement with other important business documents and records and consider creating both a traditional and digital copy for reference.

Related: How to uphold business ethics in the workplace

How do you create a partnership agreement?

The exact steps for how you decide to create the agreement are up to you and your partners and the legal system. When creating the formal document, consider requesting the help of counsel so it's worded correctly and accurately reflects the information you hope to portray. This also ensures that you've created the best agreement for all partners. Recommended steps to create a sound business agreement include:

  1. Choosing a business agreement template to follow

  2. Including the full names and contact details of all partners throughout the document, where appropriate

  3. Outlining the rights and responsibilities of all partners in detail

  4. Dating the agreement

  5. Requiring a signature from all partners

  6. Saving a digital copy for your virtual files

  7. Giving copies of the signed agreement to all partners

  8. Printing a copy to keep in your records or files

Requesting additional counsel may be beneficial if you intend to enter a complex partnership or are fostering a collective among more than two parties. Lawyers have the knowledge to ensure that your agreement merges the verbal agreement between you and your partner or partners in a way that attaches repercussions if it's broken.

Related: How to set up a business partnership: a step-by-step guide

What are points to consider before entering a partnership?

Though there are many benefits to entering a partnership, there are also many factors to consider when choosing if creating one is right for you or your company. For example, all partners are liable for the profits of an organisation, and it's compulsory for partners to report these profits on their tax returns. They are also responsible for business debts and liabilities. Other factors to consider include:

  • Handling working relationships among partners in all situations

  • Deciding if you're comfortable sharing profits and management decisions with another person or group

  • Addressing the stability of a partnership as an organisation grows and changes

  • Reviewing the potential consequences of the dissolution of the partnership later

  • Considering the potential of redistributing or reclaiming assets following the departure of a partner

Related: How to mediate conflicts (with definitions and steps)

Partnership agreement template

Use this template to help you draft an informal or sample legal agreement for you and the other stakeholders in the partnership:

This partnership agreement unites the following partners—[partner name 1] and [partner name 2]—within [business name] on [month] [day], [year].

Partner contact information

[Partner name 1]
[Partner address 1]
[Partner postcode 1]

[Partner name 2]
[Partner address 2]
[Partner postcode 2]

Section 1: nature of business

The undersigned parties agree to enter a formal partnership that meets the following business objectives:

  • [Business goal or objective 1]

  • [Business goal or objective 2]

  • [Business goal or objective 3]

Section 2: business details

The undersigned parties intend to conduct business under the name [company name] with business operations taking place at [company address], [company postcode].

Section 3: daily operations

The undersigned parties agree to the following operating conditions:

  • [Partner 1 work hours]

  • [Partner 2 work hours]

  • [Additional notes about either partner's involvement in the daily operations of the business, such as wage increases or supplementary responsibilities]

  • [Details of management structure and responsibilities for each partner]

    Section 4: partnership rights

The undersigned parties agree to the following stipulations of rights, including:

  • [Information about how to handle disputes among partners or with other management and staff]

  • [Details about hiring, elections or voting systems in all aspects of the business, as distributed to each partner]

Section 5: capital contributions

The undersigned parties agree to the following asset contributions, including:

  • [Partner 1 capital contributions]

  • [Partner 2 capital contributions]

  • [Details of record-keeping for the capital accounts of each partner]

Section 6: profits and losses

The undersigned parties agree to the following division of profits and losses:

  • [Information regarding profit-and-loss distribution per partner]

Section 7: contract length

The undersigned parties agree to these terms for a period of [number of years] years, unless an extenuating circumstance arises including:

  • [List extenuating circumstances which could cause the end of the partnership agreement, such as partner death, withdrawal or company liquidation]

Section 8: death or withdrawal of a partner

In the event of a partner's death or withdrawal, the remaining partner agrees to the following terms of handling the company's business expectations, including:

  • [List details of how the remaining partner can handle business ventures, such as transferring assets or dissolving the organisation]

Section 9: non-compete clause

The undersigned parties agree that following the withdraw of a partner, that party may not become involved with a competitor's business for a period of [number of years] years. Terms of the non-compete clause include:

  • [Additional conditions of the non-compete clause, such as the copyright of business materials and technology]

In witness of [name of witness], the undersigned partners accept this agreement on [month] [day], [year]

[Partner signature 1]
[Partner printed name 1]

[Partner signature 2]
[Partner printed name 2]

[Witness signature]
[Witness printed name]

Related:

  • How to write a business requirements document (with template)


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