A Partnership Agreement is a comprehensive legal contract that establishes the terms, rights, responsibilities, and obligations of two or more individuals or entities who agree to operate a business together for profit. This foundational document governs every aspect of the partnership relationship, from capital contributions and profit sharing to management authority, dispute resolution, and dissolution procedures, replacing default state statutory provisions with terms that reflect the partners' actual intentions.

Partnerships are governed by the Revised Uniform Partnership Act (RUPA), adopted in some form by most states, which provides default rules that apply in the absence of a written partnership agreement. These default provisions include equal profit and loss sharing regardless of capital contributions, equal management authority for all partners, and the right of any partner to dissolve the partnership at will. Because these defaults rarely match the partners' actual expectations, a written partnership agreement is essential to override them with customized terms.

A general partnership differs from a limited partnership (LP) and a limited liability partnership (LLP) in critical ways. In a general partnership, all partners share unlimited personal liability for partnership debts and obligations under RUPA Section 306. Each partner is jointly and severally liable, meaning a creditor can pursue any individual partner for the full amount of a partnership debt. This unlimited liability exposure makes the partnership agreement's indemnification, insurance, and capital contribution provisions particularly important.

Under IRC Section 701, a partnership is a pass-through tax entity, meaning the partnership itself does not pay income tax. Instead, profits and losses flow through to individual partners on their personal tax returns via Schedule K-1. The partnership agreement's allocation of profits, losses, and tax credits must comply with the substantial economic effect test under IRC Section 704(b) and the corresponding Treasury Regulations to be respected by the IRS.

A Partnership Agreement is essential whenever two or more parties decide to operate a business together. Two or more individuals are starting a new business venture and need to formalize their respective contributions, ownership percentages, management roles, and profit-sharing arrangements before the business begins operations. Without a written agreement, the default state law provisions will govern the partnership, often producing results that surprise and frustrate the partners.

Business partners are contributing unequal amounts of capital, property, or services, and the profit-sharing arrangement needs to reflect these disparate contributions rather than the default equal-split rule. One partner is contributing a patent, customer list, or other intellectual property while another contributes cash funding, creating valuation and ownership questions that must be resolved in writing.

An existing informal business relationship between co-owners has grown to the point where the lack of formal documentation creates significant risk. Businesses that have operated on handshake agreements for years face the greatest exposure because the partners' assumptions about their respective rights often diverge over time. A family business is formalizing relationships between family members who work together, establishing professional boundaries, compensation structures, and succession plans that prevent family disputes from destroying the business.

A professional practice such as a law firm, medical practice, or accounting firm is organizing as a partnership and needs to address compensation formulas, client origination credit, partner admission and withdrawal procedures, and mandatory retirement provisions. Partners are bringing in a new partner and need to define the buy-in terms, vesting schedule, and the new partner's rights and obligations.

A well-drafted Partnership Agreement must address several critical governance areas. The formation section should state the partnership name, principal office address, business purpose, term of the partnership, and the state law governing the agreement. Capital contributions must document each partner's initial contribution in cash, property, or services, with agreed-upon valuations, and establish rules for additional capital calls, including the consequences of a partner's failure to contribute when called.

Profit and loss allocation provisions must specify how the partnership distributes profits and losses among partners. While pro-rata allocation based on ownership percentage is common, partners may agree to special allocations for services, guaranteed payments under IRC Section 707(c), or priority returns on capital before profit sharing begins. These allocations must satisfy the substantial economic effect test under Treasury Regulation Section 1.704-1(b) to be respected for tax purposes. Distribution frequency and minimum distribution requirements for partner tax liability coverage should also be specified.

Management and authority provisions should define whether the partnership is managed by all partners equally or by designated managing partners. Specify voting thresholds for ordinary business decisions versus major decisions requiring supermajority or unanimous consent, such as admitting new partners, selling assets above a threshold, incurring debt, or changing the business purpose. Include each partner's fiduciary duties of loyalty and care as defined under RUPA Sections 404 and 103.

Withdrawal, expulsion, and buyout provisions are among the most important elements. Define the process for voluntary withdrawal, involuntary expulsion for cause (specifying what constitutes cause), and the buyout mechanics including valuation methodology (book value, fair market value, or formula), payment terms, and funding mechanisms. Dissolution provisions should specify the events triggering dissolution, the vote required to continue the partnership after a triggering event, and the liquidation and distribution procedures. Include dispute resolution mechanisms requiring mediation followed by binding arbitration, non-compete and non-solicitation obligations for departing partners, and an amendment procedure requiring a specified vote of partners.