Free partnership agreement template

What the law gives you if you write nothing

The default rules come from the Uniform Partnership Act, adopted in some form by most states. They are sensible as a fallback and frequently the opposite of what two particular partners would have agreed. Taking California's enacted version as a worked example, the defaults run like this. Your state's wording will differ in detail even where it adopted the same uniform act, so treat the citations as illustrative and check yours.

• Equal profits regardless of what you put in. "Each partner is entitled to an equal share of the partnership profits and ... is chargeable with a share of the partnership losses in proportion to the partner's share of the profits" (Cal. Corp. Code 16401). Put in $90,000 against your partner's $10,000 and you still split the profits down the middle.
• Equal management rights, also regardless of contribution. "Each partner has equal rights in the management and conduct of the partnership business" (Cal. Corp. Code 16401 again, the same section as the profit rule).
• No pay for working. "A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up." The partner running the business full time gets nothing extra for it unless the agreement says so.
• Majority rules on ordinary matters. "A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners", which in a two-partner firm means any disagreement is a deadlock.
• Joint and several liability. "All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law" (16306). A creditor can pursue whichever partner has money, for the whole debt.
• Clauses 7, 9 and 10 of this template exist to replace the first four of those. The fifth cannot be changed by agreement between you, which is the subject of the next section but one.

How to fill it in

Start with the three schedules at the back, because they carry the decisions and the clauses simply point at them.

• Schedule A: what each partner contributes, the agreed value of any property, and the profit and voting percentages. Agree property values in writing before the property goes in, since valuing a contributed van or a client list after a falling out is not a conversation anyone enjoys.
• Schedule B: the decisions that need both partners to agree. Tick the ones you want and add your own. Setting a dollar threshold for commitments is the single most useful entry.
• Schedule C: the buyout valuation method, which is the most consequential choice in the document. Read the buyout section below before picking.
• Clause 7: profit split. If contributions are unequal and you want that reflected, you must say so, because the default is equal.
• Clause 9: whether a working partner gets paid. If one of you is full time and the other is mainly capital, option (b) is usually the honest answer.
• Clause 11: set a dollar figure a partner cannot exceed alone. This does not stop a partner binding the partnership as against an outsider, but it makes them liable to you if they do.
• Both partners initial the acknowledgment at the back, which records that you understood the personal liability position.

The buyout clause is the one that matters

Most partnership agreements are read properly for the first time when one partner wants out, and clause 17 is the reason to have the document at all. Partnerships end, and the agreement decides whether that happens through a mechanism you both agreed while you still liked each other or through a lawsuit. There are three workable valuation methods and each has a failure mode. An agreed value that you both sign off annually is the cheapest and clearest, and it goes stale the moment you stop updating it, so clause 17 requires one from within the last twelve months. A capital account balance is easy to calculate and usually understates a profitable business, because it ignores goodwill entirely. An independent appraisal produces the fairest number and costs real money and takes time, so the clause includes a three-appraiser fallback for the case where you cannot even agree on an appraiser. Payment terms matter as much as the number. A business that has to write a large cheque at short notice to buy out a departing partner may not survive doing it, so instalments with interest are usually more realistic than a lump sum. The other half people forget is the departing partner's exposure: they stay liable to creditors for debts incurred before they left unless the creditor releases them, so clause 17 obliges the partnership to try for that release and to indemnify them for anything after. If a buyout on death is a real risk, life insurance on each partner is the standard way to fund it, and Schedule C has a line for it.

Some terms you cannot override

A partnership agreement can change most of the default rules, and that is the point of writing one. It cannot change all of them. State partnership law puts a floor under a handful of protections, and a clause trying to go below it is likely to be ineffective rather than merely aggressive. The list below again follows California's version as the worked example; adopting states have close equivalents but the detail differs.

• The duty of loyalty generally cannot be eliminated. An agreement may identify specific activities that will not breach it, or allow the partners to authorise something after full disclosure, but it cannot simply switch the duty off.
• The duty of care cannot be unreasonably reduced.
• The obligation of good faith and fair dealing cannot be eliminated, though an agreement may set reasonable standards for measuring it.
• The right to inspect the books and records cannot be unreasonably restricted. Clause 13 says so expressly.
• The rights of third parties cannot be restricted by your agreement. This is the important one commercially: your creditors never agreed to your profit percentages, and joint and several liability under Cal. Corp. Code 16306 and its equivalents runs to them regardless of what clause 7 says.
• A court's power to expel a partner in defined circumstances, and the requirement to wind up in certain cases, also sit outside what the agreement can vary.
• The list above follows California's version at Cal. Corp. Code 16103. Other states adopting the uniform act have close equivalents, but check yours, because the details differ.

Partnership agreement or LLC operating agreement

This is the choice worth making before you sign anything, because it is about personal liability rather than paperwork. A general partnership needs no state filing. It exists as soon as two people carry on a business together as co-owners for profit, whether or not they meant to form one. The trade is that partners are generally personally liable, jointly and severally, for the debts of the business. If the partnership is sued and loses, the claimant can come after a partner's house. An LLC has to be formed by filing with the state and paying a fee, and in return its members are generally not personally liable for the company's debts. It is governed by an operating agreement rather than a partnership agreement, and for federal tax purposes a multi-member LLC is usually taxed as a partnership anyway, so the tax outcome is often similar. Our position: if the business has any meaningful liability exposure, carries debt, employs people, signs leases, or has customers who could sue, form an LLC and use an operating agreement. Use a partnership agreement where you are genuinely operating as a general partnership already, where the activity is low-risk, or where a professional rules or tax reason makes a partnership the right structure. Clause 21 of this template requires both partners to acknowledge in writing that they considered the alternative and chose this, because that conversation is worth having on purpose.

Where two-partner firms come unstuck

A fifty-fifty partnership between two people has a structural problem that larger partnerships do not: there is no majority. If you disagree, nothing decides it.

• Deadlock. With two equal partners a majority vote is a tie. Clause 22 handles it by routing an operational deadlock into the buyout mechanism, so one partner ends up owning the business rather than both being trapped in it.
• One partner works far harder than the other. It is the most common source of resentment in a two-partner firm, and it is usually a drafting failure rather than a character failure. Clause 9(b) exists for it.
• One partner binds the firm to something expensive. Clause 11 sets an internal limit, and it is worth knowing that the limit protects you against your partner rather than against the supplier, who can generally still enforce.
• Money gets mixed up. Clause 14 bans commingling. A partner who runs personal expenses through the business account creates a tax problem and an evidential mess at the same time.
• A partner's spouse or estate turns up as a claimant. Clause 18 stops an interest being transferred without consent, and limits a transferee to the economics without management rights.
• Nobody updated the agreed valuation. Clause 17's twelve-month rule is there to stop the cheap valuation method quietly becoming useless.

If you are the smaller partner

Most partnership templates are written from the perspective of whoever is putting in the most money. If your contribution is smaller, or is mainly your time rather than capital, look at these before you sign.

• Check what your work is worth. If you are running the business day to day and the other partner is largely passive, clause 9(a) leaves you paid only through a profit share that may be smaller than theirs. Ask for option (b).
• Do not accept a capital-account buyout without thinking about it. If you build the business up, a capital account valuation hands the value you created to whoever stays.
• Look at Schedule B carefully. A short list of unanimous decisions means the other partner can do a great deal alone. Adding a dollar threshold and any change to the nature of the business costs them little to agree.
• Voting is separate from profits. Schedule A lets them differ, and equal voting with an unequal profit split is a perfectly reasonable structure.
• Understand that a smaller percentage does not mean smaller liability. Joint and several liability means a creditor can pursue you for the whole debt regardless of your ten percent.
• Look at the non-solicit in clause 19 and whether you could rebuild a livelihood after leaving under it.
• Get your own advice. One lawyer cannot properly act for both partners on the terms between them.

If you are the one putting in the money

The mirror image is just as real. If you are contributing most of the capital, the default rules are working against you in a way that is easy to miss, because the biggest exposure is not the money itself.

• Votes do not follow capital. Clause 10 gives each partner an equal vote regardless of contribution unless Schedule A records otherwise. A 90/10 capital split with a 50/50 vote is the single most common mismatch in these agreements, and Schedule A has a separate voting column for exactly this reason.
• Fill in Schedule B properly. It is what stops a partner with a tenth of the capital committing the business to a lease or a loan. A dollar threshold plus borrowing, security and anything changing the nature of the business is the minimum worth having.
• Elect the profit split in clause 7. Leaving it silent gets you the equal default, which is unlikely to be what a majority contributor intended.
• Record contributed property values in writing before the property goes in. Valuing a contributed van, client list or piece of software after a falling out is a fight you will not enjoy.
• Decide whether the working partner gets paid under clause 9. Paying a guaranteed payment to the partner doing the day-to-day work is often cheaper than conceding profit percentage points, and it is easier to change later.
• Your capital does not buy you protection from creditors. Joint and several liability means the partner with assets is the one a creditor pursues, which is usually the person who put the money in.
• Additional capital is not automatic. Clause 5 says no partner is obliged to contribute more, so if you expect to be the one funding the next round, agree in advance what that does to the percentages.

Tax, filings and the practical side

A general partnership does not pay federal income tax itself. It files an information return and each partner is taxed on their allocated share of the income, whether or not the cash was actually distributed to them. That last point catches new partners out badly, because a profitable year with everything reinvested still produces a tax bill, so clause 8 requires the partnership to make distributions covering tax liabilities where cash allows. On the administrative side: check whether your state or county requires an assumed name or fictitious business name filing for the partnership name, get an employer identification number rather than trading on a partner's social security number, open a bank account in the partnership's name, and speak to an accountant about capital accounts before the first year end rather than after. Clause 6 defers to the accountant on capital account maintenance. Those tax rules are genuinely technical, and unwinding them later is expensive.

When to get a lawyer involved

This template covers a straightforward two-partner business. Several situations justify advice before signing.

• The business carries real liability risk, employs people, or signs leases, in which case the LLC question above should be answered by a professional.
• Contributions are significantly unequal, or one partner is contributing property, intellectual property or an existing business.
• You want a non-compete on a departing partner, since enforceability varies sharply by state and some states will not enforce one at all.
• There are more than two partners, or you intend to admit more later.
• A professional licensing regime governs the practice.
• Family members are involved and there is an estate planning dimension.
• You are converting an existing handshake partnership, where the question of what was already agreed needs handling carefully.

A note on what this page is

This is a general-purpose template and general information, not legal or tax advice. Partnership law is state law, and while most states have adopted a version of the Uniform Partnership Act, the details differ and the statutory citations on this page are to California's enacted version as a worked example rather than as the law of your state. Partnership taxation is genuinely complicated. Read this against your own situation and take advice from a lawyer and an accountant in your state before signing.