Key Takeaways:

  • A verbal agreement can create a partnership, but a written agreement offers clarity and legal protection.
  • A strong partnership agreement should define contributions, roles, profit sharing, decision-making, dispute resolution, and exit strategies.
  • Registering the partnership and using a business name (DBA) may be required depending on your state.
  • There are three common types of partnerships: general, limited, and limited liability partnerships.
  • Consulting an attorney can ensure the agreement complies with state laws and protects all parties involved.

How to make a partnership agreement legally binding is just one of the many concerns that arise in business partnerships. In most cases, a partnership can be made with a verbal agreement and a handshake, but there are many factors to consider. There are also advantages to registering a partnership with the state.

What Constitutes a Legally Binding Business Partnership?

A partnership is a relationship that involves collaboration and a pairing of talents. There are many advantages to having a business partnership. Each partner brings something new to the business and assists others with their shortcomings. Partnerships can also be legally protected when in a limited liability partnership.

A legally binding partnership, however, requires that each partner is assigned specific roles and responsibilities, financial expectations, and future planning expectations for the business. The partnership should also have an agreement as to handling the exit of one of the business partners. Limited liability partnerships should always be registered to take full advantage of the benefits they offer.

The legal requirements for forming a partnership are not as strict as those for forming a business. In fact, legal documents are not always needed to form a legally recognized partnership. Instead, a legally binding partnership is created as soon as two separate individuals begin doing work roles together. In most cases, this is enough to create a partnership. However, it is important to take the necessary steps to protect everyone involved in the partnership.

Partnerships are regulated by state law in the state of the business or partnership. It is important to understand the specific laws regarding partnership in your state, as some states do require registration of the partnership. Some states also require business permits, licenses, and other official documents.

Partners have the following responsibilities:

  • All partners must hold up their side of the business responsibilities, financial payments, and guidelines set when the partnership was created.
  • Both partners are responsible for their share fair of the investment.
  • Each partner will follow all guidelines when acting in the name of the business.
  • Each partner is expected to uphold the duty of loyalty. This means that each partner must always act with the business's best interest in mind.
  • All partners are responsible for the payment of all debts, either with business or personal funding.

What to Include in a Partnership Agreement

While a partnership can be formed with a handshake, a well-drafted written agreement helps prevent future disputes. When considering how to write a partnership agreement, make sure to include the following key elements:

  • Business Name: Decide on a name for your partnership. If using a fictitious name, you may need to register it with your state or county.
  • Partner Contributions: Clarify each partner’s initial and ongoing contributions—whether in the form of cash, property, or services.
  • Ownership Interests: Define the percentage of the business each partner owns, which may correspond to their contributions.
  • Profit and Loss Distribution: Specify how profits and losses will be shared. This is often based on ownership percentage but can be customized.
  • Roles and Responsibilities: Outline day-to-day management duties and which partner will handle which functions (e.g., bookkeeping, vendor relations).
  • Decision-Making Authority: Determine how decisions will be made—unanimous vote, majority vote, or delegated authority—and specify which types of decisions require special consent.
  • Dispute Resolution Process: To avoid litigation, include mediation or arbitration clauses.
  • Partner Exit and Buyout Plan: Address what happens if a partner withdraws, retires, becomes incapacitated, or passes away. Establish a buyout process or succession plan.
  • New Partner Admission: Create a procedure for how new partners may be admitted to the business.
  • Restrictions on Partner Behavior: You may want to add non-compete or confidentiality clauses to protect business interests.

Including these elements ensures clarity in operations and protects the business and its owners from unnecessary conflict​.

Types of Partnerships

It is also important to evaluate the type of partnership. Different partnerships have different expectations and legal liabilities. There are three different types of partnerships to consider.

  • General: In a general partnership, each partner has equal responsibility in business decisions. This is the default type of partnership that will be assumed when legal disputes arise.
  • Limited: Limited partnerships give some partners more control over decisions, while the other partners are considered to be silent partners. This type of partnership is more complex, and partners often do not participate in daily business activities.
  • Limited Liability: Limited liability partnerships divide the financial responsibilities and tasks of the business among active both owners and silent partners. Some partners may be legally protected from liability, similar to a corporate setup. Limited liability partnerships should always be registered with the state to ensure legal protection.

In most states, if there is no legal documentation that supports the existence of a partnership, it will be considered a general partnership. This means that all partners will share the responsibilities and debts of the business. Although none of these partnerships require documentation to form the legal partnership, there are many advantages to doing so.

  • A legal partnership establishes roles and expectations.
  • Members of a legally registered partnership will have supporting documentation in legal disputes.
  • A registered partnership can be used for decision making regarding the current and future practices of the business.

You can learn more about the process of registering a partnership by visiting your state's Secretary of State website.

Registering and Naming Your Partnership

Depending on your state’s requirements, registering a partnership may be necessary. General partnerships are often not required to register formally, but limited partnerships (LPs) and limited liability partnerships (LLPs) typically must register with the Secretary of State.

You may also need to:

  • Register a “Doing Business As” (DBA): If the partnership uses a name that doesn’t include the surnames of the partners, many states require registration of the fictitious or trade name.
  • Obtain Business Licenses and Permits: Check with your state, county, and city to determine if any local licensing requirements apply.
  • File State-Specific Forms: Some states have their own forms and filing fees for different partnership structures.

Taking these steps helps establish your business legally and may also be required to open a business bank account or enter into contracts.

The Legal Ins and Outs of Forming a Partnership

Partnerships are unique in that they can be legally formed with a verbal agreement and a handshake. However, disputes and questions often arise regarding financial responsibilities and expected activities. A written contract can reduce the chances of legal disputes.

Legal Tips on How to Write a Partnership Agreement

Knowing how to write a partnership agreement is crucial to minimizing misunderstandings and protecting everyone’s investment. Here are some best practices:

  • Put Everything in Writing: Even if the law doesn’t require it, a written agreement eliminates ambiguity and is enforceable in court.
  • Customize the Agreement to Your Needs: State laws provide default rules, but they may not suit your business. A custom agreement overrides many of these defaults.
  • Use Plain Language: Avoid unnecessary legal jargon where possible. The agreement should be clear to all partners.
  • Review State Law (UPA or RUPA): Most states follow the Uniform Partnership Act (UPA) or Revised Uniform Partnership Act (RUPA), which serve as default rules if your agreement doesn’t specify otherwise.
  • Plan for the Unexpected: Include contingencies such as disability, disputes, business sale, or partner bankruptcy.
  • Review and Update Regularly: Your business will evolve—review the agreement annually and amend it as needed.
  • Get Legal Assistance: Consider hiring a lawyer to review or draft your agreement, especially for complex partnerships or when forming an LP or LLP.

If you’re unsure how to start, a business attorney on UpCounsel can help you draft a legally binding partnership agreement tailored to your needs.

Frequently Asked Questions

Is a verbal partnership agreement legally binding? Yes, in many states, a verbal agreement is enough to form a general partnership, but it’s difficult to enforce without written documentation.

Do I need a lawyer to write a partnership agreement? While not legally required, consulting a lawyer ensures your agreement is enforceable and complies with your state laws.

What happens if we don’t have a partnership agreement? Your business will be governed by your state’s default partnership laws, which may not reflect your preferences.

Can a partnership agreement be changed later? Yes, partners can amend the agreement as long as all parties agree to the changes and document them in writing.

Do I need to register a general partnership with the state? In most states, general partnerships do not need to register, but you may still need to file a DBA and obtain local licenses.

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