Partnership Agreement Template for Founders

You may be partners already, even with nothing filed or signed. This guide uses California's partnership act as its example. Under it, two or more people who carry on as co-owners a business for profit form a partnership, whether or not they intend to¹. A business set up as another kind of entity, such as an LLC, is the exception.

Most of the act is a set of defaults. Relations among partners are governed by your partnership agreement, and by the act wherever the agreement is silent². Only a short list of rules can't be changed by agreement. So list what the act would decide for you, then choose what to change.

List what each partner brings: cash, equipment, clients or work. Agree on a dollar value for each, and write down how you reached it. A split with no stated reason is the one partners remember differently once they disagree.

Then decide whether work counts as capital. California's act gives each partner an account, a running record of their stake, credited with the money and other property they contribute³ and their share of profits. Work isn't on that list, so a partner who contributes only work starts at zero. If their work should count like the other partner's cash, say so and put a value on it.

Keep profit shares and pay for work as separate terms. If one partner works full time and the other doesn't, agree on a monthly amount paid before profits are split. It isn't a salary: the IRS says partners are not employees and shouldn't be issued a Form W-2⁴, so ask an accountant how it's taxed.

By default, each partner has equal rights in managing the business³. Ordinary matters pass by majority, and anything outside the ordinary course needs every partner. With two partners, a majority means both, so any disagreement is a deadlock.

Give each partner an area to run alone, with a spending limit. List the few decisions that need you both, such as borrowing over a set amount, admitting a partner or selling the business. Then agree how a tie gets broken:

1. 1

   Name it in writing

   Either partner starts the procedure with a written notice naming the decision.

2. 2

   Meet within a week

   Talk it through directly, with the numbers each of you is relying on.

3. 3

   Try mediation

   If you're still stuck, hire a mediator within 30 days and split the fee.

4. 4

   Use the fallback

   If mediation fails, a named adviser settles that one question, or either partner may start a buyout.

Without a procedure, a partner stuck in a standoff may simply leave, and in a two-partner, at-will partnership that can end the business.

No agreement can stop a partner from leaving. California's act bars an agreement from limiting a partner's power to leave, except to require written notice². What your agreement controls is what happens next, and the defaults are blunt.

A partnership at will is one with no agreed term and no particular project to complete. California's act dissolves one when at least half the partners express the will to dissolve, and a partner who withdraws counts as expressing it⁵. With two partners, one withdrawal is half. The partnership dissolves and the whole business must be wound up, not just the leaving partner bought out.

In California, some departures don't dissolve the partnership, as when one of three partners leaves. Then the act requires the partnership to buy out the leaving partner's share, valued on the higher of the business's liquidation or going-concern value⁶. If there's no deal within 120 days of a written demand, it must pay its estimate in cash. That lump sum can be hard for a small business to find.

Your exit clause should replace both defaults. Settle five things:

• Continuation: the partners who stay may keep the business going instead of winding it up
• Triggers: withdrawal, death, long-term disability, expulsion or bankruptcy
• Price: a method you'd accept as buyer or seller, such as a profit multiple or an appraisal
• Payment: installments with interest, and insurance to fund a buyout after a death
• Notice: how much warning a leaving partner gives, and what leaving early costs

Fill in the rest. Say whether the partnership runs at will or for a fixed term, and add any limits on competing that your state allows. Choose whether disputes go to mediation, arbitration or court, and which state's law governs. Require every partner's signature for any change.

One risk the agreement can't remove: in a general partnership, every partner is personally liable for all of the partnership's obligations⁷ unless a creditor agrees otherwise. If that's more than you can carry, ask a lawyer about forming an LLC, and use an LLC operating agreement instead.

If your partner's lawyer drafts the agreement, the contract review tool for founders explains what you'd be committing to and which changes to ask for. Forming a corporation instead? Start with the founder equity split template. With the template on this page, River tests your arrangement against your state's default rules before drafting anything.