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What Is Partnership Agreement – A Beginners Guide

12 March, 2021


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A partnership agreement is a legal paper that outlines how a small business, owned by two or more people, will run.

This document specifies what each partner is responsible for, how much of the business they own, and who gets what part of the profits or losses. It covers rules on managing the business and plans for events like a partner passing away or leaving the company. Having this agreement is essential for a successful business start. To create one, partners need to discuss and decide roles, funding, profit-sharing, and how new or leaving partners are handled. If you skip this step, it’s easy to assume everyone agrees, but later it might lead to conflicts and hurt your business.

The main purpose of a partnership agreement is to have written solutions to potential problems that could arise in the business. It helps partners avoid disagreements in the future. When starting a business with others, it’s crucial to align and clearly outline how the business will operate and how money will be divided. A partnership agreement is the way to do that.

If you want to do the partnership business, you must be well aware of some partnership terminologies. It will help your business to grow in the right way. Proper knowledge of the partnership agreement will help you to run your business successfully. You must also know about the simple general partnership agreement norms.

Partnership Agreement Goes By Different Names Depending On The Industry & State

partnership agreement
  • Articles of partnership.
  • Business partnership agreement.
  • Proper formation of the partnership agreement.
  • The general form of a partnership agreement.
  • Creation of proper partnership contract.

What Does It Contain?

A partnership agreement, much like a contract, includes basic info like business name and contacts. It also details important business aspects.

  • Ownership

Each partner’s share of the business, typically as a percentage interest.

  • Decision-making

Rules for unanimous or majority decisions and voting weight based on ownership.

  • Capital contributions

Initial and ongoing investment details, clarifying partner responsibilities.

  • Profits and distributions

How profits and losses are shared, repayment of contributions, and profit distributions.

  • Death and disability

Plans for a partner’s death or inability to work, including inheritance and buyout rights.

  • Partner changes

Procedures for partners leaving or joining, dealing with responsibilities and profit-sharing.

Including these in the partnership agreement is vital for clarifying roles. They protect the business from unexpected events and plan for changes in the partnership’s future.

Types Of Partnership Agreement

There are three main types of partnership agreements that you must consider from your end. Therefore, let’s explore some of the essential facts to know more about them.

partnership agreement

1. General 

In the case of general partnerships, partners shares their liabilities, profits, and losses equally. The assets of the company will also be shared equally among the partners.

2. Limited Partnerships   

When considering the limited partnerships, you must consider protecting the partners who have not contributed the capital equally. In this form of the partnership agreement, the partner who has contributed most of the money will get the maximum share of the profit, and his stake of loss will also be more compared to the other partner.

3. Limited Liability 

The limited liability partnerships will function similarly to that of the general partnerships; the only difference here is he will provide less liability to the other partners, but the partners will get an equal amount of profits.

Benefits Of Partnership Agreements

partnership agreement

There are some of the partnership agreement’s crucial benefits that you need to consider from your end. If you want to grow your partnership business, these factors will play a crucial role in developing your business.

1. Making Proper Business Outline 

The partnership agreement will help the partners to understand that how they will function in their partnership business. It will help them to develop their business smoothly. It will help you to manage the business smoothly, and the chances of confusion will be less.

2. Clear Responsibilities 

The partnership agreement will help your partners understand their mode of responsibilities regarding the share of the profit, liabilities, capital, and losses of the business. It will guide you to make the correct decisions at the right point in time. Managing the daily affairs of the business can prove to be very handy.

3. Form Of Mediation

The most important benefit of the partnership agreement is that all the partners know their responsibilities and stakes well. It will reduce the future scope of coercion between the partners to a great extent, and hence the partners will get the scope to develop your business in the right direction.

Also Read: What Is A Probate Lawyer – A Complete Guide

Potential Consequences Of Partnership Agreement

partnership agreement

When you enter into a partnership agreement, you have to face the inevitable potential consequences of this business form. It will help your business to grow in the right direction. YOu must follow an initially simple general partnership agreement to run your business smoothly in the initial stages.

1. Scope Of Consequence Due To State Laws

Every state has different kinds of laws regarding the partnership business. In the event of the death of the partner’s insolvency, the state law can inherit that partnership business if you do not have the partnership agreement with you in proper order. It is the main reason you need to be cautious about the partnership agreement while drafting it.

2. Disputes

In the partnership business case, you may have to face disputes due to a lack of proper agreement papers. The responsibilities, profit-sharing ratios, and expectations of the partners are not mentioned in the documented format. All these factors can prove to be harmful to your business in the long run.

3. Implication Of The Taxation

For those who fall under the purview of the limited and limited liability partnership deed, if their roles and responsibilities are not mentioned clearly, the state government can impose a tax on both the partners accordingly as per the state norms. All these factors play a vital role in developing your partnership business.

Also Read: What Is Power Of Attorney – A Beginners Guide Of 2022

Why Did You Need To Have A Proper Partnership Agreement?

A formal partnership agreement will help your business to grow further without any scope of confusion and disputes among the partners. All the partners know their roles and responsibilities to start their business accordingly. The more you can think proactively in this regard, the better you can avoid the scope of confusion and disputes in the future.

Without a formal document, if you start your business, especially the partnership business, then the stakes’ will be higher in the future for your business. You must consider these points from your end if you want to run a successful partnership business. You must analyze the facts properly before you enter into a partnership business.

What Are The Core Elements Of The Partnership Agreement?

There are multiple core elements of the partnership business. Let’s find out some of the core points in this regard to understand its vital elements properly.

  • The name of your business.
  • What is the primary purpose of your business?
  • All the information of your partner, including his name and the terms of the contract.
  • Contribution of the capital done by the partner.
  • Distribution of the profit and loss of the business and its share ratios among the partners.
  • Interest in the ownership of the business.

Its Role

Without a partnership agreement, your state’s partnership laws will dictate how your partnership operates. While these laws offer standard rules for partnerships, they might not fit your business well. 

For example, if a partner leaves, your partnership might have to end and start over.

Creating a partnership agreement is crucial for a successful business. It means sitting down with your partners and making clear decisions about roles, funding, profits, handling new partners, and departures. 

If you skip this, disagreements might arise because partners have different ideas about how the business should run. This can lead to failure.

In a business’s life, conflicts happen. A partnership agreement can help reduce disagreements among partners and give clear rules for solving problems when they occur.


Hence, if you are trying to enter into partnership business, you must consider the points above. A proper well-drafted partnership agreement is essential for developing your business in the right direction. You must consider specific points in this regard to develop your business correctly. Ensure that you have made your choices in the correct order.

Ensure that all the essential points must be stated clearly in the partnership agreement. It will help your business to grow properly in the right direction. The more you can think proactively in this regard, the better outcome you can derive from your business.

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Arnab Das is a passionate blogger who loves to write on different niches like technologies, dating, finance, fashion, travel, and much more.

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