Guide
Create a partnership agreement
How to draft a partnership agreement covering essential clauses, legal requirements, and what happens if you do not have one.
A partnership agreement sets out how your partnership operates and what happens when things change. While not legally required, having a written agreement protects all partners and prevents costly disputes.
This guide explains what to include in your agreement, the legal framework that applies without one, and when you need professional help.
Do you need a written agreement?
Why you should have one anyway:
- Oral agreements are difficult to prove if partners disagree on what was agreed
- Without a written agreement, the Partnership Act 1890 default rules apply - these rarely match what partners actually intend
- Banks and investors may require sight of a partnership agreement before providing finance
- A written agreement forces partners to discuss difficult issues upfront (profit sharing, exit, disputes) rather than when conflict arises
What happens without an agreement
If you have no partnership agreement, or your agreement does not cover a particular issue, the Partnership Act 1890 defaults apply automatically.
Why these defaults often cause problems
- Equal profit sharing: A partner contributing 90% of the capital and doing 90% of the work receives only 50% of profits
- No salary: Partners who work full-time in the business cannot draw a salary - only their profit share
- Unanimous consent for new partners: One dissenting partner can block bringing in essential skills or investment
- Death dissolves the partnership: Without an agreement, the partnership automatically ends when a partner dies, potentially triggering fire-sale of assets
Key point: The 1890 Act was written for a different era. Modern partnerships need modern agreements.
What to include in your agreement
A comprehensive partnership agreement should cover these areas. The more detail you include now, the fewer disputes you will have later.
Drafting your agreement
DIY or professional help?
Simple two-partner businesses with equal contributions may be able to use a template agreement. However, professional legal advice is strongly recommended in most cases.
Common mistakes to avoid
- Copying generic templates without adapting: Every partnership is different - clauses that work for a retail partnership may not suit a professional practice
- Ignoring tax implications: How profits are allocated affects each partner's tax bill - get accountant input on profit-sharing structures
- Vague valuation methods: "Fair value" means nothing without a defined methodology - specify who values, what basis (book value, earnings multiple, independent valuation), and how disputes are resolved
- Forgetting to update: An agreement written for two partners does not automatically work when you add a third
- Ignoring regulatory requirements: Regulated professions (solicitors, accountants, architects) have additional rules about partnership structures
Updating your agreement
Partnership agreements should be reviewed and updated when circumstances change. Using a formal Deed of Variation ensures changes are legally binding.
Special considerations by business type
Professional practices
Solicitors, accountants, architects, and other regulated professionals often have additional requirements:
- Professional indemnity insurance minimums may be higher for partnerships
- Regulatory bodies may have rules about partner eligibility and profit sharing
- Consider lockstep profit-sharing (seniority-based increases) common in professional firms
Property partnerships
Where the partnership owns property:
- The partnership agreement should address how property is held (as partnership asset or by partners individually)
- Capital Gains Tax implications differ depending on ownership structure
- Consider whether departing partners can force sale of property
Family partnerships
Partnerships between family members need particular care:
- HMRC scrutinises profit allocations to family members for tax avoidance
- Profit shares must reflect genuine work contribution or capital investment
- Consider what happens if family relationships break down
Signing and storing your agreement
Once your agreement is finalised:
- All partners must sign: Each partner should have their own signed copy
- Witnesses are recommended: Not legally required but helps prove authenticity if disputed
- Date the agreement: Make clear when it takes effect
- Store securely: Keep the original in a safe place (not just a single digital copy). Consider giving copies to your accountant or solicitor
- Review regularly: Set a diary reminder to review annually or when circumstances change
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Decide whether to use a solicitor
For simple two-partner businesses, a template may suffice. For complex arrangements, significant capital, or regulated professions, get professional drafting.
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Discuss all key issues with your partners
Before drafting, agree on profit sharing, capital contributions, decision-making, exit terms, and dispute resolution. Write down what you agree.
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Draft or commission the agreement
Either adapt a template (being careful to tailor it to your situation) or instruct a solicitor. Expect to pay £200-£600 for professional drafting.
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Have all partners sign
Each partner should read the agreement carefully, ask questions about anything unclear, and sign their own copy.
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Store safely and review regularly
Keep the original secure. Review the agreement annually and whenever circumstances change (new partner, change in capital, change in roles).