A partnership agreement is the founding contract between the owners of a general partnership. It records what each partner contributes, how profits and losses are split, how decisions get made, and, most importantly, what happens when a partner wants out, becomes incapacitated, or dies.
Without one, your state's default partnership statute takes over, and its answers (equal splits regardless of contribution, dissolution when a partner leaves) are rarely what the partners actually intended.
Why the handshake is not enough
A general partnership legally exists the moment two people carry on a business for profit together, written agreement or not. That is exactly the danger: without a written agreement, state default rules apply. In most states that means profits are split equally even when contributions were not, every partner can bind the partnership to contracts, and the departure of any partner can force a dissolution. A written agreement replaces those defaults with your own rules.
- Contribution amounts and profit shares that reflect reality, not a 50/50 default
- A spending limit above which one partner cannot act alone
- A clear list of major decisions and the vote they require
- A buyout mechanism so one partner's exit does not kill the business
Understand the liability of a general partnership
In a general partnership, each partner is personally liable for the partnership's debts and for the business acts of the other partners. The agreement organizes the internal rules between partners, but it does not shield anyone from outside creditors. Partners who want liability protection should consider forming an LLC and adopting an operating agreement instead; the economics can stay identical while personal assets gain a shield.
Consider an LLC for liability protection
A general partnership offers no liability shield. If protecting personal assets matters, forming an LLC with an operating agreement achieves the same profit-sharing flexibility with limited liability.
The exit clauses partners forget
Most partnership disputes are exit disputes. This template includes a 90-day withdrawal notice, a right for the remaining partners to continue the business, and a buyout of the departing partner's interest at fair value set by agreement or an independent appraiser. For partnerships with significant value, pair the agreement with a dedicated buy-sell agreement funded by life insurance, so the buyout money exists when it is needed.
Frequently asked questions
Does a partnership agreement need to be filed with the state?
No. A general partnership agreement is a private contract between the partners. Depending on your state and business name, you may still need a DBA (fictitious name) filing, local licenses, and an EIN from the IRS.
How are partnership profits taxed?
The partnership itself pays no federal income tax. It files an information return (Form 1065) and passes profits and losses to the partners on Schedule K-1; each partner reports their share on their personal return, whether or not cash was actually distributed.
Can profit shares differ from contribution percentages?
Yes. Partners can agree to any split: for example, one partner contributes more capital while the other contributes labor, with equal profit shares. The agreement should state the shares explicitly, which is exactly what this template does.
What happens if a partner dies?
Under this agreement, the surviving partners may continue the business and buy the deceased partner's interest at fair value, which is then paid to the estate. Without an agreement, state default rules may force winding up the business.
Can we admit a new partner later?
Yes, with the consent required by the agreement (unanimous by default in this template). Admitting a partner changes profit shares and tax allocations, so record the new structure in a signed amendment.