7 Essential Clauses to Include in a Business Partnership Agreement

By Sonia Mann, Attorney at Parikh Law Group

Entering a business partnership can be rewarding, but a well-structured partnership agreement is vital to protect your investment and ensure seamless operations. At Parikh Law Group, LLC, we’re dedicated to helping you create a partnership that not only protects your investment but also fosters growth and smooth operations. 

Here’s a look at the seven key clauses every business partnership agreement should include:

Clause #1: Definitions and Nature of the Partnership

This foundational clause defines the business entity, its goals, and the responsibilities of each partner. Clear definitions prevent misunderstandings and potential disputes, detailing business activities and objectives to remove ambiguities. Comprehensive definitions of terms used in the agreement are essential to prevent misinterpretations affecting operations.

Clause #2: Capital Contributions and Ownership Percentages

It’s vital to specify each partner’s contributions, be it capital, assets, or expertise, and how these affect ownership stakes. Accurate documentation is crucial for fair profit sharing, decision-making authority, and responsibilities. This clause should include the process for future contributions and adjustments, aiding in financial planning and decision-making.

Clause #3: Distribution of Profits and Losses

Detail the method of distributing profits and losses, usually in line with ownership stakes. Specify distribution frequency and calculation methods. Include provisions for revising distributions in response to changes in the partnership structure or contributions to maintain financial flexibility and fairness.

Clause #4: Decision Making and Management

A clear decision-making framework is essential. It is recommended to outline the decision-making framework, indicating which decisions require unanimous consent and which can be made by majority vote. Define roles and responsibilities, particularly for daily operations, and dispute-handling procedures. A clear management structure supports efficient, conflict-free operations.

Clause #5: Dispute Resolution

Dispute resolution is crucial, as disagreements are inevitable. This clause should outline steps for resolving disputes through mediation or arbitration before litigation. Clear procedures help preserve relationships and resources by providing a structured path for resolving disagreements.

Clause #6: Exit Strategy

Plan for the future by detailing the processes for when a partner exits, including buyout procedures, valuation of interests, and ownership transfer terms. Proactive planning here prevents disputes and ensures smooth transitions in challenging situations.

Clause #7: Restrictions on Authority

Define each partner’s authority, particularly regarding significant decisions, debt, and contracts, to prevent unauthorized actions that might expose the partnership to liabilities. Clear boundaries ensure significant actions have mutual consent.

Your Roadmap to Business Partnership Success

A comprehensive business partnership agreement outlines the expectations and responsibilities of all parties, ensuring business longevity and success. By including these seven essential clauses, you’re setting up a robust framework for your partnership that supports smooth operations and minimizes disputes. For personalized assistance in drafting your agreement, contact us at (3120725-3476 or visit www.plgfirm.com.