Partnership Agreement Definition

Business owners, especially those starting a partnership together, need to understand what a partnership agreement is. This guide explains exactly what a partnership is and the impact it has on small businesses.

What is a partnership agreement?

A partnership agreement is a contract that governs how a small business runs its internal affairs. Partners create this agreement while they’re forming the partnership to help limit possible conflicts.

But why is it important to write a partnership agreement early on? It’s easier for everyone to understand their roles, rights, and responsibilities if there is a partnership agreement from the start. Better to have that squared away from the get-go than to sort it out during a dispute later.

So what are partnership agreements? Put another way, they are the rule book for a new small business. 

What businesses should have a partnership agreement?

Businesses that should have a partnership agreement include:

• General partnerships
• Limited partnerships
• Limited liability partnerships

Some states require limited and limited liability partnerships to have a partnership agreement. Even if one is not required, having the agreement serves as proof that the business is a formal venture (especially if it’s a registered business). Suppose, for example, that a disgruntled business partner questions the business’s structure. The partner says that the business is a general partnership, and the agreement helps prove that it’s actually a limited partnership. 

Partnership Agreement Benefits

What are some advantages of a partnership agreement? Here are some top ones:

• Provides predictability 
• Avoids having default partnership rules govern your small business
• Limits liability
• Affords the partners with clarity about how to handle disputes 
• Lays out the financial details 

Potential disadvantages of a partnership agreement include the up-front cost of creating one. But once the business has one, though, the partners are on their way to protecting their investment. Setting the business up for success includes drafting a well-written, comprehensive partnership agreement. 

If business owners decide to form a limited liability company or corporation instead of a partnership, ZenBusiness can help. Their services help entrepreneurs form a business and draft internal documents in no time. 

Partnership Agreement Considerations

What should a business owner be thinking about when writing a partnership agreement? Here are a few key considerations:

• Determining who the managers are 
• Deciding how people become a manager
• Detailing what management’s obligations are
• Creating a way for people to join (or leave) the partnership
• Clarifying who can (and must) vote and when 
• Laying out how people make capital contributions to the partnership
• Describing the financial structure of the partnership

Creating a business plan can make it easier to write the partnership agreement. Need help? No problem. ZenBusiness makes it easy to write a business plan with ease using their business plan template.

Other Names for a Partnership Agreement

Partnership agreements examples include:

• General partnership agreement 
• Limited partnership agreement
• Limited liability partnership agreement
• Operating agreements (a similar document for a limited liability company)
• Bylaws (a similar document for a corporation)

These names may differ, but they generally refer to the same governing document.

Summary 

This article covered the basics of a partnership agreement, including what it is, its important features, and things to keep in mind when drafting one.

ZenBusiness Can Help

ZenBusiness understands that starting a business can provide an entrepreneur with a lot of freedom; who doesn’t want to be their own boss? But getting to that point can be tricky. That’s why ZenBusiness provides a variety of tools, templates, and guides to help entrepreneurs start a business with as little hassle as possible. They love to help new businesses thrive.