Business Partnership Agreement: What to Include and Common Mistakes

Business partnerships end in one of three ways: one partner buys out the other, the business is sold, or the partnership collapses in a dispute. The partnership agreement determines which of these is painful and which is orderly. Without one, even friendly partnerships become expensive litigation.

Partnership vs. LLC: which structure are you forming?

A partnership agreement governs a general partnership or limited partnership. If you're forming an LLC with two or more members, you need an LLC operating agreement — which covers the same ground but under a different legal structure.

The difference matters: general partnerships expose each partner to unlimited personal liability. LLCs limit liability to each member's investment. Most business owners forming a new venture should be forming an LLC, not a general partnership.

This guide covers both contexts since the substantive questions are identical.

The 8 questions your agreement must answer

1. Ownership percentages

How is ownership split? 50/50? 60/40? Is it split equally or proportional to contribution? Specify the percentage for each partner in writing, and note what those percentages entitle each partner to (profit, voting rights, distributions).

2. Capital contributions

Who puts in what — money, assets, IP, services — and what is it valued at? What happens if additional capital is needed? Do partners contribute pro-rata? Can the business borrow from partners?

3. Profit and loss distribution

How are profits distributed? When? Many partnerships make the mistake of not specifying timing — distributions only happen when one partner needs money, which creates resentment. Set a quarterly or annual distribution policy.

4. Decision-making authority

What decisions require unanimous consent? What can be made by majority vote? What can each partner make unilaterally?

Common structure:

• Routine operational decisions: any managing partner
• Major contracts over $X: majority vote
• Admitting new partners, taking on debt, selling the business: unanimous

5. Partner roles and compensation

Who does what? What are partners paid as employees (separate from profit distributions)? This prevents the situation where one partner does all the work and the other does nothing but collects half the profits.

6. Ownership transfers and exit

Can a partner sell their interest? To whom? At what price? Who has the right of first refusal? What happens on death, disability, or divorce? This is the section most partnerships skip and most regret.

Buy-sell provisions (critical): If one partner wants to leave, how is the buyout priced? Common mechanisms:

• Agreed valuation: both parties hire an appraiser, split the cost
• Formula: trailing 12-month revenue × agreed multiple
• Shotgun clause: one partner names a price; the other can buy at that price or sell at that price

7. Dissolution

Under what circumstances can the partnership be dissolved? What happens to assets, liabilities, and ongoing contracts? Who winds up the business?

8. Non-compete and non-solicitation

If a partner exits, are they restricted from competing or poaching clients/employees? How long? In what geography? This protects the remaining partners but needs to be reasonable enough to be enforceable.

The 3 most common partnership agreement mistakes

1. 50/50 ownership with no tiebreaker. Equal ownership sounds fair but creates deadlocks. Every significant decision can be blocked by one partner. Either split ownership unequally (51/49), designate one partner as managing partner with tiebreaker authority, or build in an arbitration clause for unresolved disputes.

2. No valuation mechanism for buyouts. When a partner wants to leave, "we'll figure it out then" means expensive litigation. Agree on a formula or process in advance.

3. Vague roles leading to disputes over contribution. The partner who feels like they're doing 80% of the work and getting 50% of the profits will eventually stop doing the extra 30%. Define roles and revisit them annually.

Generate a partnership agreement template →