A Guide to Drafting a Business Partnership Agreement

A business partnership can be a great way to combine skills, capital, and resources—but without a clear and legally sound agreement, even strong relationships can turn sour. A partnership agreement serves as the foundation for decision-making, profit-sharing, and dispute resolution, protecting the rights and responsibilities of everyone involved.

Whether you're forming a new partnership or updating an existing one, here's what your agreement should include—and why involving a business attorney is essential.

1. Define the Partnership Structure

Start by identifying what type of partnership you're forming, as this will impact legal liability, tax treatment, and management roles:

• General Partnership (GP): All partners share equally in profits, losses, and liability.
• Limited Partnership (LP): Includes both general and limited partners (the latter having limited liability and no management authority).
• Limited Liability Partnership (LLP): Provides liability protection for all partners, often used by professionals like attorneys or accountants.

Why it matters: The structure affects how your business is taxed, who can be sued, and who makes decisions.

Learn more at the U.S. Small Business Administration – Choosing a Business Structure

2. Detail Capital Contributions

Outline what each partner is bringing to the business:

• Cash investments
• Equipment or property
• Intellectual property
• Services or sweat equity

Specify the ownership percentages or capital accounts tied to these contributions.

Why it matters: Disputes often arise when expectations around money or effort are unclear. Establishing contributions in writing prevents misunderstandings later.

3. Clarify Roles, Responsibilities, and Decision-Making

Spell out:

• Each partner’s duties and obligations
• Day-to-day operational roles
• Who can sign contracts or make financial decisions
• Voting rights and thresholds (e.g., majority vs. unanimous votes)
• What happens in the case of a deadlock

Include tie-breaking mechanisms like third-party mediation or rotating leadership roles.

Why it matters: Prevents power struggles and clarifies who’s in charge of what.

For insight on how legal teams help businesses manage disputes, visit Meet Our Business Law Team

4. Explain Profit and Loss Allocation

Define how profits and losses will be divided among partners:

• Equally?
• Proportional to ownership?
• Based on performance or workload?

Also note how and when distributions are made—monthly draws, annual payouts, or reinvested into the business.

Why it matters: Profit-sharing is one of the most contentious areas in a partnership. A clear formula avoids confusion and resentment.

5. Add Dispute Resolution Provisions

No matter how aligned partners may be at the outset, disagreements are inevitable. Include a step-by-step dispute resolution process:

1. Internal discussion
2. Mediation with a neutral third party
3. Binding arbitration (if agreed upon)
4. Court action as a last resort

Why it matters: Alternative dispute resolution saves time, preserves relationships, and avoids the high cost of litigation.

Reference the American Bar Association’s Business Law Section for guidance on drafting these clauses.

6. Plan Exit Strategies and Dissolution Terms

Your agreement should answer critical “what if” questions:

• What happens if a partner wants to leave?
• How is a partner’s interest valued and bought out?
• Can a partner transfer their interest to someone else?
• What triggers dissolution?
• How are remaining assets distributed?

Include succession planning in case a partner becomes incapacitated or passes away.

Why it matters: Planning for the unexpected keeps the business stable and protects everyone's investment.

7. Review Regularly and Keep It Legally Compliant

Business dynamics change over time. Revisit your agreement regularly to:

• Add new partners
• Adjust capital contributions
• Update voting rights
• Comply with changes in state or federal law

Always involve a business attorney to draft, review, and revise your agreement. A legal professional ensures the document reflects your intentions, complies with the law, and covers all necessary contingencies.

Need help choosing an attorney? Visit Choosing Legal Counsel for Small Businesses

Conclusion

A well-written partnership agreement is not just a formality—it’s a legal safety net that protects your business and personal interests. From assigning responsibilities to preparing for worst-case scenarios, this document gives your venture a solid foundation.

By partnering with an experienced business lawyer, you can draft an agreement that’s clear, enforceable, and aligned with your long-term goals. Don’t wait until problems arise—put the right protections in place today.