What Is A Partnership Agreement And How Is It Used? (2026)
Contributor
Reviewed By Adam Ramirez, J.D.
Editor
Summary
- A business partnership is formed by an agreement of the parties
- This agreement is often written to avoid misunderstandings
- A partnership agreement can also describe how the business will be run
Unlike corporations and limited liability companies, business partnerships usually do not require incorporation with the state. Instead, the partners merely need to agree to work together in a business. As a result, a partnership agreement generally comes in either oral or written form.
However, having a written partnership agreement can be wise. Learn how the right agreement can reduce the risk of misunderstandings between partners.
Understanding a Partnership Agreement
What is a partnership agreement, and what does it do? The partnership agreement usually serves two purposes. First, it proves that the partners agreed to enter into a partnership. Second, it addresses financial and operational terms for the business.
Types of Partnerships
Most partnerships fall into two types. In a general partnership, all partners are exposed to full personal liability for the actions of the business and other general partners, even when they did not know about their actions.
A limited partnership has both general partners and limited partners. General partners have full personal liability, just as in a general partnership. Limited partners, however, are only liable to the extent of their investment in the business, and their personal assets are protected.
Some states also offer a third type of partnership called a limited liability partnership (LLP). In this partnership, all partners have limited liability and protection of their personal assets. In other words, LLPs have no general partners.
Key Components of a Partnership Agreement
A partnership agreement should define whether it is general or limited. If it doesn’t, the default is a general partnership.
The partnership agreement should also include a description of the business’s financial terms, including what each partner has contributed and how they will be paid from the company’s revenue.
Finally, the partnership agreement should describe business operations. It should outline each partner’s responsibilities and duties and explain how the partners will make business decisions.
Why a Written Partnership Agreement Matters
What is a partnership agreement’s main benefits? A written partnership agreement is important because many states have laws that define default financial and operational terms. In these states, a silent agreement means that a court may force the business to operate according to the default terms, even if some of the partners intended otherwise.
How to Create a Partnership Agreement
Drafting a partnership agreement is easiest if you can start from a template. Some common templates that can help you form a partnership include the following:
- For general partnerships, you can create a general partnership agreement.
- You can create a limited partnership agreement for limited partnerships.
- Use a limited liability partnership agreement template for LLPs.
You can customize the terms of the partnership agreement template to match your business needs.
Benefit From Using a Clear Partnership Agreement
A clear written partnership agreement is recommended for almost all partnerships. A written agreement can help you avoid entering into a business or forming one without understanding all the financial and operational terms.
