Questions to Ask Before Signing a Partnership Agreement
The conversations that prevent a friendly business from becoming a courtroom drama three years later.
Partnerships fail more often from unwritten assumptions than from genuine disagreements. Two people start a business as friends, do not bother with the hard conversations, and three years later find themselves at very different points in life with very different ideas about what the company is for. A good partnership agreement is not paperwork — it is the record of those hard conversations.
This article walks through the questions every partnership should answer in writing before money or work changes hands, and what to look for in the contract that comes out of those conversations.
What does each partner actually contribute?
Start with the simplest question and answer it precisely. Cash contributions are easy to document. Sweat equity, IP brought in from prior work, customer relationships, and ongoing services are harder and almost always undervalued at the time. The agreement should specify what each partner is contributing today, what they have promised to contribute later, and what happens if they do not deliver.
How are profits and losses split?
Equity percentage and profit-distribution percentage do not have to be the same number. Two partners can own fifty-fifty but agree that one takes seventy percent of distributions for the first three years because they are funding the business. The agreement should be explicit about ownership, voting rights, distributions, and how each can change over time.
Who makes which decisions?
List the categories of decisions and the threshold for each. Hiring a junior employee might be a single-partner decision. Hiring an executive, signing a lease, taking on debt, raising capital, or selling the company are usually supermajority or unanimous decisions. Writing this down before any decision is contested is the whole point of the agreement.
What happens when a partner wants out?
Buyout provisions are the most-skipped section and the most-needed one. Define how the company is valued, what triggers a buyout (voluntary exit, death, disability, divorce, bankruptcy, termination), the payment terms, and any restrictions on the departing partner. A 'right of first refusal' lets the company or remaining partners buy out a departing partner before they can sell to an outsider.
Without a buyout provision, the company can end up with an unintended owner — an ex-spouse, an estate, a creditor — with rights they were never intended to have.
What happens if you disagree?
Deadlock-resolution clauses matter for two-partner businesses in particular. Options include mediation, arbitration, buy-sell provisions ('Texas shootout' or 'Russian roulette'), and dissolution. None of these are pleasant in practice, but they are far better than litigation with no agreed process.
Non-compete and confidentiality
Most partnership agreements include restrictions on what each partner can do during and after the partnership. A reasonable non-compete is geographically and temporally limited and scoped to actual competitive activity. An unreasonable one can be unenforceable but still cause years of conflict. Confidentiality should survive termination indefinitely.
Tax and entity structure
Are you a general partnership, limited partnership, LLC, or corporation? The choice affects liability, taxation, ability to bring in investors, and exit options. This is the conversation to have with a CPA and a lawyer together, before you sign anything, because changing later is expensive.
A pre-signing checklist
Before you sign, make sure you can answer in one sentence each: what I am contributing, what I am getting, how I get paid, who decides what, how I can exit, and what protects me if my partner exits. If any answer is fuzzy, the contract needs more work — not less.
If you have a draft in front of you, upload it to GameIt.me. You will get a plain-English summary of every section, flashcards for the obligations on both sides, and a tutor you can ask 'what happens if I want to leave in year two?' or 'who has the authority to take on debt?' all grounded in the actual document on the table.
Frequently asked questions
For anything beyond a hobby project, yes. A lawyer who has seen hundreds of partnerships will surface questions you have not thought of and structure the answers in ways that hold up later. The cost is trivial relative to the cost of unwinding a bad partnership.
A partnership agreement governs a general or limited partnership. An operating agreement governs an LLC. The contents overlap enormously, but the legal frameworks differ — your entity choice determines which document you need.
Yes, with the consent required by the agreement itself (usually unanimous or supermajority). The easier it is to amend, the easier it is to evolve as the business grows.