Partnership Agreement Review Guide

What it is

A partnership agreement is a contract among partners that governs how the business operates, how decisions get made, and what happens when partners come or go. The form depends on entity type: General Partnerships (GPs), Limited Partnerships (LPs), Limited Liability Partnerships (LLPs), and many businesses informally called "partnerships" that are actually LLCs or corporations.

Without a written agreement, default state law fills the gap — usually badly. Default partnership law often allocates profits equally regardless of contribution, requires unanimous consent for major decisions, and dissolves the partnership on any partner's exit. A written agreement overrides these defaults.

The hardest negotiations are usually about what happens at the end — buyouts, valuations, non-competes, dissolution mechanics. The instinct is to skip these because "we'll figure it out then." The reason to negotiate now is that, by then, you can't.

Common clauses to check

1. [ 01 ]

   Capital contributions

   What each partner contributes — money, property, services, IP — and the value assigned to each contribution.

   What to look for

   • Specific listing of each partner's initial contribution with stated value.
   • Treatment of services contributions (sweat equity) — vesting, valuation, tax treatment.
   • IP contributions clearly described and assigned.
   • Future capital call provisions — when and how partners must contribute more.
   • Consequences of failure to make required capital calls.

   Red flags

   • Vague valuation of non-cash contributions (services, IP, goodwill).
   • Mandatory capital calls without notice or limit.
   • Penalty for failure to contribute that includes "forfeiture of all interest."
2. [ 02 ]

   Profit & loss allocations

   How profits and losses are divided among partners. Often different from ownership percentages.

   What to look for

   • Specific allocation percentages stated.
   • Distinction between profit allocation and cash distributions.
   • Special allocations for tax purposes (depreciation, deductions).
   • Treatment of carried interest or promote (for investment partnerships).
   • Tax distributions to cover partners' tax liability on phantom income.

   Red flags

   • Allocations changeable by majority vote without consent of affected partner.
   • Disproportionate loss allocations without offsetting profit allocations.
   • No tax distributions in pass-through entities — partners pay tax on income they didn't receive.
3. [ 03 ]

   Decision rights & voting

   Who decides what. The most common partnership-killer is mismatched expectations about decision-making.

   What to look for

   • Decisions requiring unanimous consent (typically major: dissolution, sale, admit new partners).
   • Decisions requiring majority or supermajority.
   • Day-to-day operational decisions (delegated to managing partner or executive committee).
   • Voting weight — by ownership percentage, by capital, or per capita.
   • Procedure for partner meetings and notice requirements.

   Red flags

   • All decisions require unanimous consent — paralyzes the business.
   • All decisions decided by managing partner — minority partners have no voice on major matters.
   • Voting tied to "current capital account" — easily manipulated.
4. [ 04 ]

   Distributions

   When and how cash flows out of the partnership to partners.

   What to look for

   • Distribution policy — discretionary vs. mandatory minimums.
   • Tax distributions (must distribute enough to cover partners' tax bills).
   • Order of distribution (return of capital, then preferred return, then split).
   • Reserve requirements for working capital.

   Red flags

   • Distributions entirely at managing partner's discretion.
   • Subordinated distributions (some partners always paid before others) without justification.
   • No tax distributions in flow-through entities — leaves partners holding the bag.
5. [ 05 ]

   Transfer restrictions

   Whether partners can sell or transfer their interest. Almost always restricted.

   What to look for

   • Right of first refusal (ROFR) for the partnership or other partners.
   • Drag-along and tag-along rights.
   • Approval requirements for new partners.
   • Permitted transfers (estate planning, family entities).

   Red flags

   • Absolute prohibition on transfer — no liquidity ever.
   • Approval at "sole discretion" of managing partner (vs. reasonable).
   • ROFR with extended consideration windows that block secondary sales.
6. [ 06 ]

   Withdrawal & buyout

   What happens when a partner wants out, dies, becomes disabled, or gets fired.

   What to look for

   • Buy-sell triggers — voluntary withdrawal, death, disability, divorce, bankruptcy.
   • Valuation methodology — formula, appraisal, prior agreement.
   • Payment terms — cash at closing, installment notes (3-7 years typical), interest rate.
   • Non-compete during installment period.
   • Tag-along rights for involuntary departures.

   Red flags

   • No buyout obligation — departing partner stuck with illiquid interest.
   • Valuation by "sole discretion" of remaining partners.
   • Long installment payouts (10+ years) at low interest rates.
   • Buyout triggered automatically by life events (divorce, etc.) without partner choice.
7. [ 07 ]

   Deadlock resolution

   What happens when partners can't agree. Critical for two-partner businesses.

   What to look for

   • Mediation as first step.
   • Buy-sell mechanisms — Texas shootout, Russian roulette, Dutch auction.
   • Right to dissolve and wind up.
   • Non-binding tiebreaker (industry expert, predetermined neutral).

   Red flags

   • No deadlock provisions at all — leads to litigation.
   • Buy-sell mechanisms that disadvantage the partner with less liquidity.
   • Forced sale provisions that don't require notice or fair valuation.
8. [ 08 ]

   Non-compete & non-solicit

   Restrictions on what partners can do during and after the partnership.

   What to look for

   • Non-compete during the partnership (typically required).
   • Post-departure non-compete — geographic scope, duration (12-24 months), and activities.
   • Non-solicit of clients and employees.
   • Carve-outs for personal investments and pre-existing activities.

   Red flags

   • Worldwide non-compete with broad scope.
   • Non-compete continues during installment payout regardless of cause of departure.
   • Non-solicit covering all clients, even pre-partnership relationships.
9. [ 09 ]

   Dissolution & winding up

   How the partnership ends and how assets get distributed.

   What to look for

   • Dissolution triggers (term expiration, vote, sale of substantial assets).
   • Winding-up process — who manages, fiduciary duties.
   • Order of distribution on liquidation (creditors first, capital, then profit splits).
   • Continuing obligations (warranties, indemnification) post-dissolution.

   Red flags

   • Dissolution by managing partner alone.
   • Indefinite winding-up periods.
   • Distribution preferences that strip minority partners.

Other watchouts

• Fiduciary duties — partners owe each other duties of loyalty and care; some can be modified, some can't.
• Conflicts of interest — disclosure and approval procedures.
• Confidentiality obligations among partners.
• Indemnification of partners for actions on behalf of partnership.
• Insurance — D&O, business interruption, key person.
• Tax matters partner / partnership representative for tax filings.
• Books and records access — by partners and ex-partners.
• Amendment procedure — how the agreement itself gets changed.

Frequently asked questions

Do I need a written partnership agreement?

Yes, before any meaningful business activity. Without one, your state's default partnership law fills the gap — typically with provisions that are wrong for almost every partnership. The default rules often allocate profits equally regardless of contribution, allow any partner to bind the partnership, and dissolve the partnership on any partner's withdrawal.

What's the difference between general and limited partnerships?

General partners (GPs) have full control and full personal liability for partnership debts. Limited partners (LPs) have no control over operations but limited liability — they can't lose more than their investment. LPs typically can't manage without losing the liability shield. Most modern "partnerships" are actually LLCs or LLPs, which combine pass-through taxation with liability protection.

What's a Texas shootout?

A buy-sell mechanism for resolving deadlocks. One partner names a price; the other partner can either buy at that price OR force the offering partner to buy at that price. Forces the offering partner to be honest. Variants include Russian roulette (similar mechanic) and Dutch auctions (descending price).

How are partnership profits taxed?

Partnerships are pass-through entities — the partnership itself doesn't pay income tax. Profits flow through to partners' personal returns and are taxed at individual rates. Partners pay tax on their share of profits even if no cash is distributed ("phantom income"), which is why tax distributions matter.

Can a partner be removed against their will?

Most partnership agreements allow expulsion for cause (gross misconduct, breach of fiduciary duty, criminal conduct), with valuation and buyout per the agreement's terms. Without a clear procedure in the agreement, removal usually requires unanimous consent or court order. Modern agreements include explicit expulsion provisions to avoid this.