A partnership agreement is a legally binding agreement that governs how a partnership business will be administered, including but not limited to the responsibilities of the partners, ownership and investment, and profits and losses to be shared. By the phrase partners we often think of two people, however it is noteworthy that in the context of partnership businesses there is no limit to how many people make up partners. The three common types of partnership agreements include:

  • General Partnership – whereby all the partners are equally sharing liabilities, profits and assets of the business.
  • Limited Partnership – Partners in limited partnerships are secured from unequal capital contributions. In this approach, the partners who provide the most capital or assets reap the most profit and bear the greatest liability, compared to the partners who contribute the least capital or assets, who also bear the least profit and liability.
  • Limited Liability – Similar to general partnerships in operation, limited liability partnerships maintain the partners’ equal ownership of the business and its revenues while limiting their personal liability.
what is partnership agreement


Incorporating properly drafted Partnership Agreements is crucial, absence of clearly stated terms and conditions may lead to disagreements over matters like ownership division, duties and obligations, and asset partition. Potential disagreements between partners can be settled via a partnership agreement.

To ensure that the relationship is formed and managed properly while preventing partner disagreements, partners should engage into a legal agreement. When contracts don’t appropriately address concerns, disputes can lead to pricey legal actions and unwarranted financial losses for all parties.

All partners are bound by the terms of a partnership agreement, which serves as the basis for a business partnership. It establishes the partnership for success by describing ever day operations of the company and the rights and obligations of each partner.

A fun fact about partnership business is that you can start a partnership business without any formal partnership agreement as no state has a mandatory requirement to sign partnership agreements. However, this tends to cause severe hardships to the partners if disputes begin. Hence it is always recommended to have a clear and comprehensive partnership agreement drafted and signed, to avoid landing into hot waters in future.

significance of the partnership agreement


As discussed earlier a properly drafted partnership agreement is extremely important. Every business’s unique requirement should be taken into account when drafting a partnership agreement. Some of the clauses incorporated in partnership agreements are similar to any other agreement, those are the general clauses such as name of the business and signatory parties, commencement date, duration of the agreements, terms and condition, etc. However, unlike other agreements partnership agreement must include some of the special clauses which are discusses hereunder:

  1. Type of Partnership – Since each type of partnership has varied structure and features, it is very important to have the type of partnership defined at the very beginning of your agreement.
  2. Purpose of the Partnership – just like we incorporate the purpose of the agreement in the regular agreements, the partnership agreement must include the purpose of the partnership. This clause allows the signatory parties to understand the crux and aim to be achieved through the work done under the agreement.
  3. Information of the Partners and Their Contributions – yet another important clause. This shall define the position of the partner and what do they have to offer in the said partnership. It is crucial to have this information agreed upon prior to the commencement of the work.
  4. Liability of the Partners – The partners’ unrestricted personal accountability for the debts and obligations of the company is the distinguishing feature of a general partnership.
  5. New Partners and Exits of Previous – just imagine what would happen if partners began to quit in the middle of the year, or new partners coming in with new rules and regulations. This would create a havoc. Hence having a clause governing the entrance and exit of partners is equally important as the aforementioned clauses are.
  6. Non-Disclosure and Non-Compete Clauses – through incorporating this clause the partners are barred from disclosing sensitive information pertaining to the business.
what partnership agreements must include


A partnership agreement must endure, although a business undergoes several modifications. It is most crucial to have a properly drafted partnership which must not only include the aforementioned clauses, but it can also include customized clauses according to the nature of the partnership. It is most significant to have all the terms and conditions discussed and mentioned prior to getting into any form of business.

You may also like to read: What Types of Legal Documents are Used in Business Sector?

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A partnership agreement is a legally binding agreement that governs how a partnership business will be administered
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The Legal Contracts
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