Should I Enter into a Partnership Agreement?

A partnership is a legal association of two or more persons to carry on as co-owners of a business for profit. Although not required by law, you may have to create written Articles of Partnership. This may be required, for instance, if you want to open a company bank account.

These articles would define the contributions made by the partners to the business—financial, managerial, material, or other. They would also define the roles of each partner in the business relationship. All articles should be filed with your secretary of state.

Is It Really Necessary to Put a Partnership Agreement in Writing?

I think having a detailed Articles of Partnership is a great idea. It is important to have in writing who is going to contribute what to the partnership, who is going to get paid what, which expenses such as driving allowances and meals the partnership is going to pay for, what happens if one partner wants to terminate the partnership, which duties are specifically intended to be performed by each partner, and even approximately how much each partner is expected to work for the partnership each week.

Even if your business partner is your best friend or your spouse, I strongly recommend getting all of this in writing. A good agreement can keep you all good friends!


Before choosing a legal entity for your business, you should consult with an attorney. Avvo, a legal service provider, can connect you with attorneys that have expertise in this area. 

A partnership differs from a corporation in terms of the limited life of the partnership, unlimited liability of at least one of the partners, co-ownership of the assets, mutual agency, share of management, and share in partnership profits. In a traditional simple partnership each partner has unlimited liability, but there are some special kinds of partnerships where you can limit the liability of some partners.

What Are the Advantages of a Partnership?

  • Setup expenses are kept to a minimum, and the legal documentation required to form a partnership is more straightforward and less complicated than that needed for incorporation.
  • Partners have more motivation, as they directly share in the profits.
  • It is generally easier to attract capital for financing a business operating under a partnership than it is for a sole proprietorship.
  • It is easier to execute decisions than it would be in a corporation, but it is more difficult than it would be in a sole proprietorship.
  • This arrangement will give you more freedom from federal regulations and taxation.

What Are the Disadvantages of a Partnership?

  • Until you form a special partnership that limits the liability of one or more partners, all partners are responsible for 100 percent of the company’s debts. All partners can be held liable for partnership business activities and the commitments of any partner. This is not something to consider lightly. For example, if you partner Joe takes out a loan to buy a new car in the name of the partnership and defaults on the loan payments, then you would be responsible for paying them.
  • Long-term capital may be difficult to find. However, using partnership assets as collateral makes it somewhat easier than in the case of a sole proprietorship.
  • Buying out a partner can be a difficult process, unless an agreement is reached at the beginning of the partnership.
  • If any one partner decides to quit or passes on, the partnership is dissolved. The business can still operate based on the right of survivorship and the creation of a new partnership. Partnership insurance should be considered.

What Types of Articles Might Be Found in a Partnership Agreement?

• Name • Purpose • Domicile • Duration of agreement • Character of partners: general, limited, active, or silent • Contributions by partners: at inception, at a later date • Business expenses • Authority • Separate debts • Books, records, and method of accounting • Division of profits and losses • Draws or salaries • Rights of continuing partner • Death of a partner; dissolution and winding up • Employee management • Release of debts • Sale of partnership interest • Arbitration • Modifications of partnership agreement • Settlements of disputes • Required and prohibited acts • Absence and disability

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.