Partnership agreement: Overview, definition, and example
What is a partnership agreement?
A partnership agreement is a legal document that outlines how two or more people will run a business together. It sets the rules for ownership, responsibilities, profit-sharing, and decision-making, helping partners avoid confusion and disputes.
Think of it as a roadmap for your business relationship. Without it, disagreements about money, roles, or what happens if someone leaves can turn into major problems. A solid partnership agreement keeps things clear, fair, and legally sound.
Why is a partnership agreement important?
A handshake might feel like enough when starting a business with a friend or colleague, but without a written agreement, things can get messy. A partnership agreement is important because it:
- Defines each partner’s responsibilities and expectations.
- Explains how profits and losses will be shared.
- Lays out the process for decision-making and conflict resolution.
- Protects the business if a partner wants to leave, becomes unable to work, or passes away.
Without a partnership agreement, state laws will decide how your business is run—which may not be what you and your partner had in mind. Having a written agreement puts you in control and helps prevent costly legal battles.
Understanding a partnership agreement through an example
Imagine two entrepreneurs, Sarah and Tom, decide to open a marketing agency together. They agree to split everything 50/50—workload, profits, and decision-making. At first, things go well, but over time, Tom wants to focus on sales while Sarah prefers handling the creative side.
Without a partnership agreement, their business roles are unclear, leading to frustration and disagreements. But with an agreement in place, their responsibilities are already defined, and they have a process for adjusting roles if needed.
Later, Tom decides to leave the business. Thanks to their partnership agreement, they already have a plan for how to handle his exit, including how his share of the business will be valued and transferred. This prevents conflicts and keeps the business running smoothly.
An example of a partnership agreement clause
Here’s an example of a clause that might appear in a partnership agreement:
“Each Partner shall contribute equally to the capital, management, and decision-making of the Business, unless otherwise agreed in writing. Profits and losses shall be distributed based on each Partner’s ownership percentage. In the event of a dispute, the Partners agree to resolve matters through mediation before pursuing litigation. If a Partner wishes to exit the Partnership, the remaining Partner(s) shall have the first right to purchase the exiting Partner’s share at fair market value, as determined by an independent valuation.”
Conclusion
A partnership agreement is more than just a formality—it’s a crucial document that protects both the business and the people running it. It ensures that all partners are on the same page from the start and provides a clear plan for handling profits, decision-making, disputes, and exits.
If you’re starting a business with a partner, don’t rely on verbal agreements or assumptions. Taking the time to draft a strong partnership agreement can save you from major headaches down the road and keep your business on solid footing.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.