How to write a business partnership agreement: what to agree first and the key clauses

What must you include in a business partnership agreement to avoid legal issues later? In short: get the structure right first, agree the commercial basics with your partners, and then make sure the agreement covers how profits and losses are shared, what happens if a partner dies, and which decisions need everyone's approval. That last point is what stops you losing control of your own business. Here is how I approach it.

Choosing your business partnership type

Before you start drafting anything, you must understand and decide which kind of business partnership you want to deploy. There are a few to choose from:

• the general partnership;
• the limited partnership;
• the limited liability partnership (LLP);
• the joint venture; and
• the collaboration.

I will not go into each of these here. If you have not yet decided, start with what is a partnership and the advantages and disadvantages of partnerships, and see what is an LLP and joint venture agreements for the other options.

The type you choose matters because it changes who is liable, whether anything needs registering, and what the agreement is actually governing. For the rest of this article, when I say partnership agreement I simply mean the agreement that details how your partnership, collaboration or joint venture is going to work between you and your partners, whichever structure you pick.

What to agree with partners before drafting

Once you have chosen the type of partnership you want to adopt, you need to sit down with your partners and discuss some key details. These are the commercial decisions that the agreement will record, so they need to be settled before any drafting starts. The main ones are:

• Liability. The amount of liability that each of the partners is going to take on.
• Duties. The duties of each of the partners, whether specific duties for a particular partner or general duties owed to the partnership and to the rest of the partners.
• Capital. The amount of money or capital that is going to be invested by each of the partners.

In my experience, partners who skip this conversation and go straight to a template end up with a document that does not reflect what they actually agreed, because they never agreed it. Have the discussion first, write down the answers, and then draft. It is far easier to agree these points while everyone is enthusiastic about the new venture than to argue about them once money is on the table.

The three key clauses in a partnership agreement

With the basics agreed, these are the top three things that I think you should include in your business partnership agreement.

• How profits and losses are shared. State clearly how profits and losses are to be split between the partners. Do not leave this to assumption. Are profits split equally, or in proportion to what each partner has put in or the work each partner does? Whatever you decide, write it down. It is the clause partners will care most about when the business does well, and when it does badly.
• What happens when a partner dies. State whether the partnership is supposed to dissolve, meaning cease to exist, as soon as one of the partners dies, or whether it continues. This is something people rarely want to think about at the start, but it has a direct effect on everyone else's livelihood. Decide it now, while it is hypothetical, and record the answer in the agreement.
• Decisions that require partnership approval. List the kinds of decisions that should require the approval of the partnership before they are taken. For example, you might state that none of the partners may take on debt on behalf of the partnership above a certain threshold without the consent of the partnership. The threshold itself is for you and your partners to set. This is the clause that protects you from losing control: without it, a partner can commit the business to obligations you never agreed to.

These three clauses are the minimum. The liability, duties and capital points you agreed earlier should be recorded in the agreement too, so that the document reflects the whole deal between the partners. For more on what a typical partnership deed contains, see contents of a partnership deed.

Next steps

Choose your structure, agree liability, duties and capital with your partners, and then make sure the written agreement covers profit and loss sharing, death of a partner and the decisions that need everyone's consent. If the partnership involves significant money or an unequal split of roles, have a corporate solicitor draft or review the agreement before anyone signs.