When to Use

  • You want to create a business agreement among two or more partners specifying their rights and responsibilities.
  • The partners need to agree on their respective ownership interests, capital contributions, and managerial duties.
  • You want to clearly define how important decisions will be made and how voting will be conducted.

Other Names for This Document

  • Business partnership agreement
  • General partnership contract
  • Note that a general partnership agreement is not the same as a joint venture agreement, a limited partnership agreement, and a limited liability limited partnership (LLLP) agreement.

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Help Guide

Our general partnership agreement solidifies the relationship between business partners and is an important tool for laying the groundwork for a successful, long-term business venture. The following instructions provide key insights and considerations when creating this essential document.

Partnership Information

To begin, you will include the partnership's name, effective date of the agreement, business purpose, and address. When choosing the partnership's name, it is a good idea to make sure that no other company is using a similar business name so as to not violate any federal trade name laws. You can check with your Secretary of State to see which names are already in use. Many states also require that you register any fictitious business name you use, called a "DBA" (doing business as). Check your state's Secretary of State website for more information.

When adding the effective date, you can choose any date that you want the partnership agreement to go into effect. In answering the business purpose, it is best to leave your purpose broad, so as to not limit your operations in the future. However, remember that you can always amend your general partnership agreement in the future if need be. Lastly, use the address of the partnership's primary place of business. If one has not yet been established, you can use the address of one of the partners.

Initial Capital Contribution

The total initial capital is how much money the partners are investing in the partnership to begin operations. Simply indicate how much capital each partner is investing initially. Partners may always add additional capital at a later time. The contribution deadline is the date by which each partner must deposit his or her initial capital contribution.

Ownership

When entering each partner's ownership percentage in the partnership, be sure that all percentages add up to 100%. For instance, if there are three partners and each will own an equal share of the partnership, then you would enter 33.3% for each.

Profits and Losses

Next, you will specify how the partners will divide profits and losses of the partnership. These are the net profits and net losses the partnership either earns or suffers during each accounting cycle. You may then specify how often any net profits that remain will be distributed to the partners. The partners will always have the option of retaining earnings to reinvest them in the partnership. This is usually a good idea during the initial stages of the business to keep it growing.

Decision-Making and Management Roles

Here you will indicate how the partners will make important decisions. How decisions are made is completely at your discretion and usually depends on the number of partners and the type of business, among other factors. Keep in mind that it is often advisable to try to avoid any possibility of a tied vote between the partners, which often arises if there is an even number of partners and a majority vote is required to pass any decision.

Partnership Checks

You will then specify whether each partner has the authority to write checks drawing on a joint partnership bank account in the name of the partnership.

Vacation Days

Next, you have the option of indicating how many vacation days each partner is allowed to take each year. This may not be necessary if the partners are not working full time.

Accounting

In answering whether you will use cash or accrual accounting, "cash accounting" records revenue when money is received and expenses when money is paid, and "accrual accounting" records revenue when it is earned and expenses when they become due. Most companies use accrual accounting unless they are very small.

Governing Law

The governing law is the law that will control the partnership and settle any disputes between the partners. Usually, partners choose the state of their headquarters, but this is not required. It is also recommended that you select to include an arbitration agreement. This will help you avoid the time and expense of settling disputes between the partners in a formal court of law.

Executing Your Agreement

After completing the steps, print out the agreement and have all the partners and their spouses (or domestic partners) sign it in front of a notary public.

Spouses are required to sign it because the agreement requires that all spouses give up their right to inherit the ownership interest of any partner that leaves the partnership. Instead, the partnership will have the right to buy out any departing partner's ownership interest. This helps avoid the messy scenario that can occur if a partner dies and his or her spouse is forced to become a partner and have a hand in managing the partnership.

Once the document is signed by all the parties involved, simply distribute copies to all the partners.

Frequently Asked Questions

What is a general partnership agreement?

A general partnership agreement outlines the rights and responsibilities of two or more partners owning a for-profit business. The agreement typically includes the upfront capital contributions of the partners and also indicates the nature of the business.

Unlike corporations and LLCs, a general partnership is not a distinct legal entity separate from its owners. This means that partners personally incur all debts and liabilities on behalf of the partnership.

When should I use a general partnership agreement?

Although a general partnership agreement may be made orally, it is highly recommended that a written agreement always be used whenever two or more people decide to run this type of for-profit business together.

Similar to a sole proprietorship, a general partnership is the default business structure created automatically whenever two or more people decide to conduct business together.

Do I need to file or register my partnership agreement?

You are not required to file a general partnership agreement with your state or local government. However, some states may permit you to do so. It is recommended that you visit your state's Secretary of State website (or similar business division website) in order to review any options they may provide. If permitted, there may be certain benefits available to partnerships that voluntarily register.

What documents are necessary to form a general partnership?

Formation

Unlike corporations and LLCs, general partnerships can usually be formed without filing legal documents with the state. However, be sure to check with the Secretary of State in the state where your business is located to ensure that there are no documents that must be filed in order to begin the legal existence of the partnership.

Governance

A general partnership agreement helps you to clearly define the terms of your partnership by establishing a division of labor, specifying each party's ownership contributions, and determining what happens when one party wants to leave the company.

Ownership

Your general partnership agreement or other document should specify the ownership stake of each partner.

Tax

Apply for an Employer Identification Number by completing IRS Form SS4 or by applying online.

What is joint and several liability?

Partners in a general partnership are said to be "jointly and severally" liable for the partnership's obligations. This means that each partner may be held legally responsible for the total amount of any partnership debt. A party that brings a claim against the partnership may pursue one or all of the partners. If, as a result of the claim, one partner is forced to repay the debt in full, then that partner may later seek reimbursement against the remaining partners for their share of the debt in a separate proceeding.

Should I settle disputes with arbitration or mediation?

Alternative dispute resolution (ADR) is becoming an increasingly popular alternative to settling disputes in court, which is often expensive and time-consuming. Unless there is a specific reason why the parties believe court is necessary, it is usually recommended that contracting parties settle their disputes through one or all of the following processes.

Informal negotiation – Whether or not you plan on settling a dispute in court or through ADR, the judge or arbitrator will want to see that the parties have first attempted to reach a solution on their own. Informal negotiation simply means having all interested parties come together to negotiate a settlement, often involving compromise. If this fails, the parties typically proceed to mediation.

Mediation – Mediation is similar to negotiation but involves an impartial third-party mediator who helps the parties work through their issues. Mediation is also more organized, and often proceeds according to a set of rules, such as those of the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Service (JAMS). The mediator is not a decision-maker and does not issue any sort of binding resolution. Instead, the mediator may make recommendations, which the parties may agree to voluntarily accept. Mediation is often faster and less expensive than arbitration, which is more similar to formal court. However, if mediation fails to reach a resolution, the parties typically proceed to arbitration.

Arbitration – Arbitration, like mediation, proceeds according to a set of predefined rules. However, instead of a mediator, someone called an arbitrator is empowered to make a binding resolution to the dispute. Therefore, an arbitrator is more similar to a judge than a mediator. All parties to the arbitration process must agree beforehand to accept whatever decision the arbitrator reaches. Again, arbitration is normally much faster and less costly than pursuing a claim in court.

Note that mediators and arbitrators are normally attorneys or former judges with years of experience in the fields in which they practice ADR. This allows them to offer valuable insight and skill to help reach fair and reasonable settlements.

Contracts that include ADR clauses often require the parties to start with informal negotiation and then proceed with mediation and eventually arbitration if each fails to produce a resolution.

What is the difference between mediation and arbitration?

Mediation uses an impartial third-party mediator who helps the parties to a dispute work through their issues. Similar to a court of law, mediation occurs according to a set of rules and procedures.

The mediator is not a decision-maker and does not issue any sort of binding resolution. Instead, the mediator may make recommendations to settle disputes, which the parties may agree to voluntarily accept. Mediation is often faster and less expensive than arbitration, which is more similar to formal court. However, if mediation fails to reach a resolution, the parties typically proceed to arbitration.

Arbitration, like mediation, proceeds according to a set of predefined rules and procedures, such as those mentioned above. However, instead of a mediator, one or more arbitrators are empowered to make binding resolutions to a dispute. Therefore, an arbitrator is more similar to a judge than a mediator. All parties to the arbitration process must agree beforehand to accept whatever decision the arbitrator reaches. Again, arbitration is normally much faster and less costly than pursuing a claim in court.

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Checklist

Step 1: Gather Information

As you complete your general partnership agreement, you will need to provide certain relevant information. This includes the partnership address, partner capital contributions and ownership percentages, and management roles.

Step 2: Answer Key Questions

Use the information you collected to complete the partnership agreement. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected.

Step 3: Review and Sign

It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. After completing the questionnaire, you can make textual changes to your document by downloading it in Microsoft Word. If no changes are needed, you can simply download the PDF version and sign. These downloads are available by navigating to the Documents section of your account dashboard.

When signing the document, be sure to follow any additional instructions related to signing and witnessing the document. Any such instructions will either be located next to the signature line or in the instructions attached at the end of the document.

When using a notary, you must wait to sign the document until they are present.

Step 4: Distribute and Store Copies

At a minimum, all parties that sign the document should receive a copy once it is fully executed (everyone has signed). Other interested parties may need or want copies as well. Be sure that you store your copy in a safe location. It is a good idea to keep both a physical and electronic copy.

Step 5: Periodically Review and Update

It is easy to forget the ins and outs of your agreement. Periodically reviewing it will help you stay familiar with any responsibilities or requirements so that you can determine when it needs changes or additions.

Step 6: Complete Related Documents

Completing documents such as a loan agreement and employee handbook may help offer additional protection. For example, loan agreements between partners or other lenders are important for protecting both the borrower and lender. Additionally, any company with employees needs to have an employee handbook in place to comply with state and federal employment laws.