8 Most Important Clauses to Include in a Partnership Agreement

Starting a partnership? Welcome to the beginning of an exciting new venture! You and your partners have ideas, dreams, and funding – and you’re ready to hit the ground running.

The first steps you take to establish your partnership and create a partnership agreement are absolutely critical in helping you reach your vision. Whenever you go into business with a partner, you want to make sure you’ve got all your legal ducks in a row before the rubber meets the road. The last thing you want is to hit a snag while you’re going full speed ahead.

Although you may be tempted to create your partnership agreement out of examples or templates you find online, the best approach is to talk to a business lawyer about your specific circumstances. Your partnership’s foundations will be much stronger for it – and much more attractive to investors, clients, and future partners alike.

1. The Basics of the Partnership
Your partnership agreement should start by establishing basic information about your venture. You want to make sure you get these terms correct to start your partnership on the right foot.

Your partnership’s name – You can also include your partnership’s type in your name, along with any other names under which your partnership will do business.
Your partnership’s principal office – Either the office of a managing partner or a registered agent where official and legal documents will get delivered.
The length of your partnership – Will your partnership continue in perpetuity or operate only for a specific length of time? Can either partner quit the partnership at will?
The purpose of your partnership – What activities will your partnership engage in? What types of services or products are you selling?
The types of partners that make up your partnership – Partnerships can have general partners and limited partners, each with different responsibilities and liabilities.
Governing law – If there’s a dispute that involves your partnership, which state’s laws will decide the outcome? Where would you prefer to go to court in the case of a lawsuit?

2. Percentage of Ownership in the Partnership

When creating your partnership agreement, it’s critical to lay out how ownership interests will be handled between partners. Terms of ownership can cause conflict if they’re not spelled out clearly or if they haven’t taken into account each of the partner’s interests.

A business lawyer can help you anticipate possible scenarios and handle them successfully. You should be able to answer the following questions:

How much of a stake will you and your partners each get in the partnership?
What will each partner get if you sell the partnership?
Are you willing to take on any new partners? If so, what ownership interest will they get?
What happens if one partner wants to withdraw from the partnership?
What are the other partners’ options when it comes to buying out a partner?
How will ownership interests be handled in drastically altered circumstances, such as a partner’s death, bankruptcy, or retirement?

You may want to include additional terms to protect your partnership for the future, such as a non-compete clause for any partners who end up leaving the partnership.

3. Each Partner’s Authority in the Partnership

Even if you and your partner have been on the same page since day one, it’s impossible for you to agree on everything all the time. A clear authority and decision-making structure can help keep disputes from dragging down your partnership.

Who makes the important decisions in the partnership?
Who has a say in deliberating important partnership decisions?
What types of decisions require unanimous partner agreement or consent, and which types of decisions can partners make on their own?

4. Each Partner’s Contributions to the Partnership

You should clearly put into writing what each partner has contributed to the partnership and will contribute in the future. This should cover not only financial contributions and investments but also how much time and effort that partner is willing and expected to put into the venture.

Will the partners contribute real estate, equipment, gas mileage, or bring in customers? These expectations should be laid out as clearly as possible for the benefit of everyone involved.

5. Distributions, Allocations, and Profit and Loss Division

Although this partnership may be a passion for you, it’s also a venture to make money.

Will any partners receive a salary from the partnership and how much?
Which partners will get paid, how much, and when?
How will you split your business profits between all the partners?

6. Partnership Management and Dispute Resolution

No one wants to imagine your partnership going so far south that you and your partners become unable to agree on how to move forward. Fortunately, it’s your business lawyer’s job to anticipate issues like these and prepare you to handle them as constructively as possible.

A partnership agreement allows you to set the terms of dispute resolution between partners. For example, you can require partners to try mediation before escalating the dispute. If mediation doesn’t work, you can set terms for arbitration in order to keep your dispute out of the courts. Court cases become public record as soon as they’re filed, which most people want to avoid.

7. How to Handle Critical Developments in the Partnership

Business doesn’t always proceed as planned, for better or for worse – so it helps to be prepared. Some industries are prone to certain types of “critical developments” more than others. An experienced and knowledgeable business attorney can help you set the terms for how to successfully handle any major changes that affect your partnership.

What happens if a partner becomes sick, retires, or passes away?
How will you evaluate your business if you get an offer to sell?
When can you modify your partnership agreement and what’s the process?

8. How to Handle Dissolution of the Partnership

The last thing you want to think about at the beginning of your partnership is the end, but thinking about your partnership’s terms of dissolution can save you from difficulties later on. The partnership dissolution process will be different depending on the state in which you operate, so it’s important to find a local business lawyer who can help.

Read more about the most important factors when entering a business partnership.

At Holmes Business Law, we can create a partnership agreement that accurately reflects your hopes and aspirations, protects your new venture for the future, and sets you up for success. Call our Philadelphia area offices now at 215-482-0285 to get started.