What to include in a partnership agreement

A partnership agreement should explain how the owners will run the business when circumstances change, not merely record that they intend to work together. It is most useful when it turns commercial expectations into clear, workable arrangements.

Begin with the partners' contributions

List money, equipment, premises, intellectual property and expected work. Distinguish assets contributed to the partnership from assets that remain personally owned but are made available for business use.

Record whether an amount is capital, a loan or a reimbursable expense. If those categories are left unclear, a later departure can become a dispute about who is entitled to what.

Agree profits, losses and drawings

The Partnership Act contains default rules, including equal sharing of capital and profits and contribution towards losses, subject to an agreement to the contrary. Do not assume that a larger initial payment or more working hours automatically changes the default allocation. ^[1]

Explain the agreed formula, when it is reviewed and how cash drawings relate to allocated profit. Include a process for dealing with excess drawings and tax information.

Set authority and information rights

Decide who can sign contracts, borrow, recruit staff or approve major purchases. Define ordinary decisions and matters needing unanimous or other specified approval. Internal rules should also be considered in light of a partner's authority towards third parties. ^[2]

Provide regular access to financial and operational records. An agreement is difficult to enforce constructively if one partner cannot see the information needed to understand a decision.

Plan for membership changes

• The process for admitting a new partner.
• Notice and valuation arrangements on retirement.
• Treatment of death, incapacity or prolonged absence.
• Ownership and use of business names and client records after departure.
• Responsibility for debts, guarantees and ongoing claims.

A creditor release may be needed separately from the arrangement between partners. Do not assume that a retirement clause binds a bank or landlord that did not agree to it.

Include a proportionate dispute process

Set a route for discussion, mediation or other agreed resolution and identify what happens to urgent business decisions while a dispute is unresolved. Check the governing law and whether the arrangement fits England and Wales, Scotland or Northern Ireland.

Turn expectations into instructions a drafter can use

Ask each partner to prepare a short description of their contribution, expected income and role. Compare the descriptions together before producing a single agreed brief. A statement such as equal partners can conceal different expectations about working hours, ownership of equipment and responsibility for losses.

Use a contribution schedule with separate entries for capital, loans, assets and work. If a partner lets the business use a personally owned workshop, explain the intended rent, maintenance responsibilities and what happens when the partnership ends. Do not leave the drafter to infer a property transfer from the fact that the business works there.

Test the profit clause with actual numbers

Imagine the partners agree to allocate £60,000 of annual profit in a sixty-forty ratio. That produces £36,000 and £24,000 before considering each person's tax position and other adjustments. If their drawings have been £30,000 each, the drawing balances differ from the profit entitlements. The agreement should explain how the difference is reconciled and what cash can remain in the business.

Test a loss-making year as well. Does the same ratio apply, and what happens if one partner cannot provide additional funds? Establish the commercial answer before signing, with advice on the legal and tax effect. The arithmetic illustrates questions for drafting rather than a model allocation suitable for every partnership.

Write a decision process that works under pressure

Distinguish ordinary spending from decisions that change the business materially. Include borrowing, admission of another partner, significant asset disposals and changes in the nature of the activity where relevant. Check how the agreed process interacts with the statutory position and dealings with third parties.

Specify how a proposal is circulated, what information accompanies it and how approval is recorded. If the partners cannot agree, identify what happens to essential bills and client delivery while the disagreement is addressed. A clause requiring discussion is less useful if it leaves nobody able to authorise an urgent routine payment.

Coordinate exit terms with outside commitments

Take a proposed retirement through the whole process: notice, valuation, settlement, customer handover and release from external obligations. Identify the documents needed from a lender or landlord and who will request them. An agreement between partners may allocate costs internally without releasing a person from a creditor's rights.

Ask how the settlement operates if a customer pays late, a claim appears after departure or a valuation assumption proves wrong. Appropriate adjustment mechanisms can make these outcomes easier to handle than an unexplained promise to settle fairly.

Read the final draft against the agreed brief. Resolve any missing or contradictory term before signing and keep the executed version available to every partner. The agreement should explain the business the partners intend to run, including the points they once found awkward to discuss.

Bring a written commercial outline to the adviser rather than asking a template to make the decisions for you. Professional drafting is most effective once the partners have identified the bargain they actually want.

For a focused assessment of the proposed clauses and missing arrangements, explore partnership agreement review.