Business Partnership Agreement: What it is and who may need one

Though starting a business can be an exciting venture, there are necessary steps an owner, or owners, must take to make sure their business can overcome adversity—including any disagreements between owners or partners. In an ideal world, business partners would always agree on how to run their company, but unfortunately that’s not always the case. This is why it’s a good idea for partners to enter into a partnership agreement.

A partnership agreement is a binding document that outlines who is responsible for which aspects of the business, such as day-to-day operations or bookkeeping, indicates the amount of company ownership each person holds, and creates a contingency plan in case one or more of the partners dies or wants out of the business.¹

Though it isn’t illegal to start a business without a partnership agreement, it’s best practice to avoid formalizing or incorporating a business without a proper partnership agreement.²

Types of partnership agreements

Just as every business is different, partnership agreements can take many forms and have varying degrees of formality; however, they generally fall into one of these categories:

General partnerships: These are the most common type, in which partners have full liability and participate fully in the business. These are also the most easily dissolved and informal.³

Limited partnerships: In a limited partnership, there are general partners who participate in the daily activities of the business, and limited partners, who contribute almost strictly financially. The agreement will outline who contributes to which activities, who is a general partner and who is a limited partner.³

Limited liability partnerships: Limited liability partnerships are less common than the above types. In these agreements, all partners are responsible for all financial and legal obligations, but are insulated from mistakes or decisions made by one of the other partners.³

What’s included in a partnership contract?

It’s a good first step to consult legal counsel when creating a partnership agreement. Generally, the terms of a partnership agreement contain many of the same stipulations and outline most of the same information, including: the name of the company, who contributes what, who is compensated (and for how much) and what happens if a partner needs to withdraw or passes away.1  You might also consider more rigorous stipulations like non-compete clauses for partners who have stakes in other businesses.³ 

Again, the recommended first step is to consult a lawyer to make sure everything in your agreement is covered so you can reduce the risk of running into problems in the future.

Who needs a business partnership agreement?

Though not illegal to operate without a partnership agreement, you should consult with your legal counsel to determine if and which partnership agreement best fits your needs. If you don’t form an agreement, certain aspects of your business could be out of your control and potentially be dictated by state laws, which may be at odds with the best interests of some of the partners.⁴

Growing your business

Even if it feels like going through the hoops of creating a partnership agreement is a hassle, it will save you and your partners stress and time in the future, and often helps you mitigate any liability or financial problems from becoming catastrophic. As you begin to scale and grow your business, a partnership agreement will help lay the groundwork for expansion and the responsibilities that come with it.

And as you grow, be sure to check out Nationwide’s business solutions to see how we can help your business succeed for years to come.