What Should You Include in a Written Partnership Agreement?

While not a legal requirement, a partnership agreement outlines each partner's responsibilities and memorializes the essential terms of the contract.

While you're not legally required to draft a written partnership agreement, doing so is important for several reasons. First, a partnership agreement outlines each partner's responsibilities and memorializes the essential terms of the contract. Also, if there's a conflict among the partners, an unambiguous written agreement will help resolve the problem.

A contract is called an "agreement" for a reason -- everyone involved must agree to the terms of the deal. You and your partners can agree on anything you want as part of your contract, but at a minimum it should include:

• Nature and purpose of the partnership. This guarantees that partners will not deviate from the essential purpose of the business.

• Capital contributions of each partner. This ensures that no one can dispute a partner's capital contribution to the business. The contract should also account for other non-cash contributions such as goods, services or time.

• Profit and loss allocation. Normally a partnership allocates profits and losses equally, but this isn't always the case.

• Authority of each partner. The contract should determine which partner or partners will run the partnership on a daily basis and how the duties will be divided.

• How to admit new partners. Most agreements require a unanimous vote to admit new partners.

• What happens if a partner dies. Normally, when one partner dies the partnership is automatically dissolved and liquidated. You don't have to accept this process, however: It's your agreement, and you can do what you want.

• How to buy out a partner's share. The contract should dictate which circumstances -- such as death, divorce or illegal activity -- require the partnership to buy out a partner's share in the business and how to execute the buyout.

• Signature authority on partnership bank accounts. You may allow each partner to sign on behalf of the whole partnership, or you may require all partners to sign all checks.

• Conflict resolution. There may be times when you simply cannot resolve a dispute. The contract may allow partners to hire a mediator or to submit the problem to binding arbitration instead of pursuing traditional legal action.

Uniform Partnership Act

Every state except Louisiana has adopted either the Uniform Partnership Act (UPA) or the Revised Uniform Partnership Act (RUPA). The UPA -- which lays out basic partnership-agreement stipulations -- comes into play when a partnership encounters problems that its written agreement doesn't cover. But beware: Many states have modified the Act or failed to update their laws as the UPA has changed over the years. Check with an attorney to see if your state has adapted the UPA.

The UPA can provide a sound reference when you and your partners draft your agreement, but don't rely solely on the UPA to define key clauses in your partnership agreement. Create those clauses yourself to reflect your unique circumstances and preferences.

For more information, read our Checklist for Drafting General Partnership Agreements and Checklist for Drafting Limited Partnership Agreements.

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