What a partnership agreement should cover before you need it

Aug 29
3 min read

Updated: 2 days ago

Introduction

Two people run a business together with no written agreement. Where the law provides default rules, those rules apply, and they are frequently not what either partner would have chosen — equal profit shares regardless of contribution, or a partnership that dissolves entirely when one person leaves.

The agreement is not a formality. It is a list of the specific things partners argue about, decided in advance by people who are still on good terms. Every item on it exists because somebody, somewhere, had a serious dispute about it. The agreement is a list of other people's expensive lessons, offered to you for the cost of an afternoon.

1. What a partnership agreement should cover starts with ownership shares

The foundation.

Who owns what proportion, and whether that reflects capital, effort or something else. Where shares are unequal, recording why prevents the argument in year three about whether it is still fair. Circumstances change and the reasoning does not, which is exactly why it should be recorded.

2. Capital contributions and what happens if more is needed

The recurring question.

What each person put in, whether it is repayable, and what happens when the business needs further funding. If one partner can contribute and the other cannot, the agreement should say how that affects ownership.

3. Profit sharing and drawings

Separate from ownership.

How profit is divided, how much can be drawn and when, and how much is retained. Owners with different personal circumstances need different amounts of income, and the mechanism should exist before it is needed. One partner with a mortgage and another with none will want different things from the same profit.

4. Roles, responsibilities and time commitment

The most common source of resentment.

What each partner does and roughly what hours are expected. It is not about clocking in; it is about having a stated expectation to refer to when somebody's contribution changes substantially.

5. How decisions are made

Two tiers.

Day-to-day decisions either can take alone, and significant matters requiring agreement — borrowing, hiring, large purchases, taking on partners. With two owners, include a mechanism for deadlock.

6. How a partner exits

The clause that gets used.

Voluntary departure, retirement, and the notice required. Most importantly, how the departing share is valued, who has the right to buy it, and over what period it is paid, because a business rarely has the cash to pay out immediately. Staged payment over two or three years is normal and should be agreed rather than negotiated.

7. Death, incapacity and long-term illness

Uncomfortable and essential.

What happens to the share, whether the remaining partners can require its transfer, and how it is funded. Without this, a family member inherits a stake in a business they have no involvement in.

8. Restrictions during and after the partnership

Protecting what was built.

Whether a partner can run a competing business, and what they may do on leaving in relation to customers and staff. These must be reasonable in scope to be enforceable in most jurisdictions.

9. How disputes are resolved

Before litigation.

An agreed process — discussion, then mediation, then a defined mechanism. Partners who fall out without one end up in court over matters that a stated procedure would have resolved in a fortnight.

Have it drafted properly for your jurisdiction. The default rules that apply without an agreement differ substantially between countries, and a template from elsewhere may address problems you do not have while omitting the provision that would actually protect you.

Conclusion

Cover the specific things partners argue about, decided while everybody is still content.

Record ownership shares and the reasoning behind any inequality, set out capital contributions and what happens if more funding is needed, separate profit sharing from ownership and define drawings, state roles and expected time commitment, establish which decisions need agreement and how deadlock breaks, define the exit mechanism including valuation and payment terms, address death and incapacity, keep restrictions reasonable enough to be enforceable, agree a dispute process, and have it drafted for your own jurisdiction.