Free Partnership Agreement Template

A partnership agreement is a legal contract between business partners that defines their roles, responsibilities, and how profits and losses are distributed, used to prevent disputes and protect the partners’ interests in the business.

Using a Partnership Agreement template means you and your new business partner will have an agreement you can rely on and be confident that your requirements are met.

Table of Contents

• When to Use a Business Partnership Agreement
• What to Include in a Partnership Agreement
• Why Create a Partnership Agreement

When to Use a Business Partnership Agreement

Any arrangement between individuals, friends, or families to form a business for profit creates a partnership. As there is no formal registration process, a written business partnership agreement intends to form a partnership.

It also sets out in writing the critical details of how the partnership will run.

Investors, lenders, and professionals often ask for an agreement before allowing the partners to receive investment money, secure financing, or obtain proper legal and tax help.

What to Include in a Partnership Agreement

A general Partnership Agreement should generally have details outlining at least the following:

• Who are the partners
• What did each partner contribute
• Where are you doing business
• When does it begin and end
• Why was it formed
• How are profits and losses distributed
• What will happen if a partner leaves or passes away

Here are some other valuable details an agreement might include:

Accounts

• Capital Accounts: the members will keep a separate account for each partner’s capital contributions
• Income Accounts: the members will keep a separate account for each partner’s profits and losses from the partnership
• Salary and Drawing: will the partners receive compensation, and can they withdraw from their income account at will
• Bank Accounts: the members will keep a separate account for the partnership’s funds

Management

• Books and Records: how the members should maintain their books and records, and who can inspect them
• Management: how the partners will manage and the duties of the partners
• New Partners: when and how can new partners join the partnership

Partners

• Dissolution: when and how the partnership will be dissolved
• Withdrawal: when and how a partner can leave the partnership
• Retirement: what happens if a partner retires
• Removal: how to remove a partner
• Death: what happens if a partner dies
• Buyout: whether other partners have the right to buy out another partner’s interest if they leave the partnership

General

• Restrictions on Transfer: are there any restrictions on a partner’s ability to transfer their interests in the partnership
• Arbitration: how will disputes about the agreement be resolved
• Governing Law: which state’s laws apply if there is a problem with the agreement

You must also register your partnership’s trade name (or “doing business as” name) with the appropriate state authorities.

Why Create a Partnership Agreement

There are several reasons why it’s essential to create a Partnership Agreement, including:

It avoids the state’s default partnership rules

Without an agreement, your state’s default partnership rules will apply. For example, if you do not detail what happens if a partner leaves or passes away, the state may automatically dissolve your partnership based on its laws.

Suppose you want something different than your state’s de facto laws. In that case, a formal Partnership Agreement allows you to retain control and flexibility on how the partnership should operate.

Most states have adopted the Uniform Partnership Act (1914) or Revised Uniform Partnership Act (1997).

It avoids unexpected tax liability

You may also be subject to unexpected tax liability without this document. A partnership itself is not responsible for any taxes. Instead, it is taxed as a “pass-through” entity, where the profits and losses pass through the business to the individual partners.

The partners pay tax on their share of the profits (or deduct their share of the losses) on their tax returns.

Without a Partnership Agreement that spells out each partner’s share of the profits and losses, a partner who contributed a sofa for the office could have the same profit as a partner who contributed the bulk of the money to the partnership.

The sofa-contributing partner could end up with an unexpected windfall and a large tax bill to go with it.

Helps avoid disputes

It outlines how decisions are made, the responsibilities of each partner in the decision-making process, and each partner’s role in the partnership. Establishing clear voting rights can help avoid conflicts, especially when making big decisions, such as adding a new partner.

Voting rights can be split 50-50 if there are only two partners, but you may need a trusted associate to be delegated with a vote in the case of a deadlock.

Voting rights could also be allocated by how much a partner has contributed to the partnership.

Your Partnership Agreement can also include what should happen in the case of a dispute. This could be through arbitration, mediation, litigation, or all three.

Clearly outline financial information.

Profits and losses are significant factors in a partnership: a Partnership Agreement details in-depth all financial information.

Typically, partners will equally share in the profits and liabilities of the partnership. However, this equal division can sometimes be the center of a dispute. A comprehensive legal document outlining specific financial contributions and entitlements information can help minimize confusion.

Suppose one partner has contributed more than the other. In that case, the agreement can be more equitable by focusing on each partner’s contribution, ongoing expenses, non-monetary contributions, and sweat equity.