What is a Partnership Agreement?

A partnership agreement is a written or oral agreement that governs decision making within a partnership, as well as how key decisions are handled. This agreement is essential for the orderly running of any enterprise organized as a partnership.

Why You Need a Partnership Agreement

There are multiple reasons why it is a good idea to create an agreement for any newly-formed partnership. The main reasons are as follows:

Profit sharing. The partners need a clear delineation of how profits and losses will be distributed amongst them, thereby avoiding later disputes.
Dispute resolution. The agreement clarifies exactly how disputes are to be handled, such as via partner votes or mediation. This safeguards the interests of all partners.
Roles and responsibilities. The agreement states who will have which roles, and what each person will be responsible for.
Partner departures. The agreement itemizes how the partners will be bought out if they decide to leave the partnership. This can avoid trouble over the price to be paid to departing partners.

Contents of a Partnership Agreement

A partnership agreement should include information or provide instructions about the following topics:

The names of the partners
The amounts contributed by each partner
The rights and responsibilities of each partner
Whether partners are designated as general partners or limited partners
The proportions of partnership gains and losses to be apportioned to each partner
Procedures related to the withdrawal of funds from the partnership, as well as any limitations on these withdrawals
How key decisions are to be resolved
Provisions regarding how to add partners and terminate partners
What happens to partnership interests if a partner dies
What steps to follow to dissolve the partnership

Related AccountingTools Courses

Law Firm Accounting

Partnership Accounting

Partnership Tax Guide

If a partnership agreement does not include the preceding topics, then there is a risk of acrimony among the partners when a decision must be made, and there is no formal guidance regarding how to proceed.