What to Include in a Partnership Agreement

A partnership agreement's main job is to override the default rules a state's partnership act would otherwise apply, and most of those defaults surprise the people they govern. Under the Uniform Partnership Act (1997), the law in some version in nearly every state, two founders who put in $90,000 and $10,000 and say nothing else split profits and losses equally (section 401(b)), the one who works full time gets no extra pay for it (section 401(h)), and either one can sign a contract that binds the business (section 301). None of that is a mistake in the statute. It is what the law assumes two people who went into business together would have wanted, absent anything in writing to say otherwise, and it is wrong often enough that an agreement exists to replace it with an actual decision.

Section 103(a) of the Act states the rule plainly: the partnership agreement governs relations among the partners, and "to the extent the partnership agreement does not otherwise provide," the Act fills the gap. That makes a partnership agreement less a single document to fill out and more a checklist of defaults to accept or change, clause by clause. The ten that matter most are below, each with the rule that applies if the agreement says nothing, sample wording for three of them, and a full template at the end to start from. A lawyer licensed in the partners' state should read the signed agreement, because a handful of states depart from the uniform text on points that matter (dissociation and noncompete enforceability especially), and this page covers the uniform rule, not every state's variation.

Section 401 of the 1997 Act is the one section that does the most work by default. It sets equal profit and loss shares, no pay for ordinary work, equal management rights, majority vote for day-to-day matters, and unanimous consent for anything outside the ordinary course or for admitting a partner. An agreement that changes nothing here has, by omission, chosen all of it.

Section 401(a) credits each partner with an account equal to the money and the value of any property contributed, plus that partner's share of profits, and charges it with distributions and losses. The agreement should state, in dollars, what each partner put in on day one (cash, equipment, a building, or unpaid work, with an agreed value for anything that is not cash) and whether either partner can be asked to put in more later. Section 401(d) already entitles a partner who advances money beyond an agreed contribution to be repaid with interest, as a loan, which is worth knowing before anyone assumes an extra deposit into the business account is a gift to the partnership.

The capital account matters most at the end, not the start: on a sale or a dissolution, section 807 settles accounts by crediting and charging each partner's share of the gain or loss, and a partner whose account comes out negative owes the difference to the partnership. An agreement that is clear about contributions on day one makes that final settlement a matter of arithmetic rather than argument.

Two separate questions hide inside "decision-making": who has to agree before the partnership does something, and who can make the partnership legally bound by signing. Section 401(f) and (j) answer the first: equal management rights, a majority vote for ordinary business, and unanimous consent for anything outside it or for amending the agreement. Section 301 answers the second, and answers it generously: any partner's act that appears to be ordinary business for a partnership like this one binds the firm, whether or not the other partners actually agreed, unless the other side knew the partner lacked authority.

That gap, between what the partners privately decided and what a partner can make stick with a signature, is where small partnerships get hurt. A spending-limit clause closes most of it inside the firm (a partner who signs above the limit without consent has breached the agreement and owes the partnership for it), but it does not protect a lender or supplier who had no notice of the limit. Section 303 is the public half of the fix: a statement of partnership authority, filed with the state, can name who is authorized to sign for the partnership and limit the rest, and once filed it binds a third party who had notice of it. Few small partnerships file one; most rely on the private clause and plain notice to the people they deal with regularly.

Bringing someone in is already covered by the default (unanimous consent, section 401(i)), so the clause mainly needs to state the terms: what the new partner contributes, what percentage they get, and how the existing partners' percentages are diluted to make room. Section 306(b) already protects a new partner from the firm's past: a person admitted into an existing partnership "is not personally liable for any partnership obligation incurred before the person's admission." That rule applies whether the agreement mentions it or not, but stating it removes a reasonable worry a new partner otherwise has to take on faith.

This is the clause small partnerships skip most often and need most. Without it, a partnership at will (no fixed end date, which is most of them) dissolves the moment one partner gives notice of intent to withdraw (section 801(1)); one person can end the business for everyone. With an agreement that lets the others continue instead, a departing partner is bought out at the price section 701 sets: the greater of liquidation value or going-concern value, as of the date of departure, with interest until paid. That price and the time to pay it are exactly what writing a partnership exit clause before you sign and, where death or disability is the trigger, a buy-sell agreement are built to fix in advance rather than negotiate after the fact.

Removal works the other way: expelling a partner the others want out. Section 601(4) lets the other partners expel one by unanimous vote only for a short, specific list of reasons (becoming subject to a court order charging their interest, for instance); it does not let the majority remove a partner just for being difficult. An agreement can add its own grounds for expulsion, as long as it does not try to eliminate the protections section 103(b) makes nonwaivable, such as the duty of loyalty.

A dispute that gets this far usually benefits from a process written down before anyone is angry: mediation or arbitration ahead of litigation, and a noncompete clause tied to whatever buyout the departing partner receives, since a state is far more likely to enforce a restriction that was paid for than one that was not.

In practice this means an agreement can shape how the duty of loyalty applies (naming, for example, that each partner may also run an unrelated side business) but cannot write the duty out of existence, and it cannot stop a partner from ever being able to leave. Are you liable for your business partner's debts covers the liability side of this; the agreement decides how the partners share a loss among themselves, not whether a creditor can collect from any one of them.

The clauses above, in order, plus the ones every agreement needs but that do not turn on a legal default (formation, purpose, term, governing law), make a complete first draft. Download the template as a text file and fill in the brackets: it is general information built from the structure of the uniform act, not a document to sign without a lawyer licensed in the partners' state reading it first, since several states depart from the uniform rules this page describes, particularly on dissociation and on noncompete enforceability.