A business partnership agreement should, at minimum, define ownership percentages, capital contributions, decision rights, profit distribution, departure and buyout terms, and a deadlock-breaker — and its absence is the most expensive omission in small business law. When partners disagree without a written framework, state default partnership law decides, and defaults rarely match what the founders would have chosen. Uniform Partnership Act provisions adopted in most states, for example, presume equal ownership and equal management rights regardless of unequal contribution, and permit dissolution at any partner's election. This article lists what a solid agreement covers, clause by clause.
Business News 7 publishes information, not legal advice; have a qualified attorney draft or review any partnership agreement.
What Should the Ownership and Money Clauses Say?
The financial core of the agreement answers four questions. What does each partner contribute in cash, property, and pledged time, valued and dated? What percentage does each hold, and is any of it subject to vesting? How are profits and losses distributed — pro rata, by a salary-plus-split structure, or by a formula that rewards sweat equity? And what happens if the business needs more capital: who must contribute, what happens if a partner cannot, and does dilution follow automatically? Writing these while the numbers are small and feelings are warm is dramatically easier than renegotiating them mid-dispute, and unequal-but-undocumented contributions are the root of most documented partner breakdowns.
Who Decides What, and Who Can Bind the Company?
Decision clauses assign authority by domain and threshold. Typical tiers: each partner runs day-to-day operations in their area alone; defined amounts of spending, borrowing, or hiring require majority approval; major events — selling the company, taking a loan above a threshold, adding a partner, changing the business's core — require unanimous written consent. Just as important is authority to bind: which partners may sign contracts, checks, and leases, and up to what amount. Ambiguity here produces the classic failure where one partner commits the company to an obligation the other first learns about from a creditor.
How Should Departures and Deadlock Be Handled?
Exit mechanics are the heart of the document. A buy-sell clause sets the trigger events — death, disability, voluntary withdrawal, involuntary expulsion for cause — and the price mechanism, commonly a formula based on book value or a multiple of earnings, refreshed by periodic appraisal. Funding matters too: life insurance on partners is the standard way to ensure a buyout at death is payable without forcing a distressed business sale. For deadlock, proven mechanisms include a coin-flip or shotgun provision (one partner names a per-share price, the other chooses to buy or sell at it), staged negotiation with a deadline, and mediation before any court action. Deadlock clauses feel theatrical until the first 3-2 standstill, at which point they are the only machinery that works.
What Do Partners Forget Most Often?
Three omissions recur in documented disputes. First, non-compete and non-solicit terms for departing partners, without which a withdrawing partner can open across the street and take the client list. Second, intellectual property assignment, ensuring work product and the company name belong to the partnership, not individually. Third, a dispute-resolution venue and governing law clause, which prevents a partner who moved out of state from forcing litigation far from the business. Each is a paragraph when written early and a lawsuit when written late.
Should Every Partnership Put It in Writing?
Yes, including family partnerships, where the absence of documents does the most silent damage because nobody wants the conversation. Even a two-page signed memorandum covering ownership, money, decisions, and exits beats the state default. The consistent lesson from partnership litigation: the agreement's value is measured not on signing day but on the worst day of the relationship — and partners who never face that day have lost nothing by having prepared for it.
For more context, read How Founders Split Equity Without Wrecking the Company.
For more context, read bootstrapping vs seed round.
For more context, read How a One-Person Business Reaches $1 Million in Revenue.