The Essential Guide to Creating a Partnership Agreement

By Michael D. Rubin, CEO & Founder · Updated September 2026 · 754 words

A partnership agreement is the written contract between co-owners that sets out who owns what, who does what, how decisions are made, how money is handled, what happens when someone leaves and how disputes are resolved. Partners who trust each other often skip it. That trust is exactly what the agreement protects, because money, roles and exits are where even good partnerships come under strain.

Writing it while everyone is getting along is far easier than negotiating it during a disagreement, and it costs much less than the dispute it prevents.

What the agreement should cover

Depending on how your company is organized, the document may be called a partnership agreement, an LLC company agreement or a shareholders' agreement. The topics are the same:

• Ownership and profit sharing. Each partner's percentage, how profits are distributed and whether distributions follow ownership or effort.
• Roles and responsibilities. Who runs operations, sales and finance, and how much time each partner is expected to contribute.
• Decision-making. Which decisions one partner can make alone, which need a majority and which need everyone, such as borrowing, hiring senior staff or selling the company.
• Capital and money. Who puts in more money if the business needs it, what happens if a partner cannot, and how partner loans are repaid.
• Exits. What happens if a partner wants out, retires, becomes disabled, divorces or dies, and how that partner's share is valued and paid for.
• Non-compete and confidentiality. What a partner may do after leaving, and how company information is protected.
• Disputes. A path for resolving disagreements, such as mediation or arbitration, before anyone goes to court.

The exit section deserves the most care

Most partnership disputes that end badly are about leaving. A strong agreement includes buy-sell provisions: rules for when a partner's share must or may be bought, by whom, at what price and on what payment terms.

The price mechanism matters most. A fixed number written years ago is usually out of date, and a formula tied to earnings can itself be argued over. An independent valuation at the time of the event, using a stated method, tends to be the fairest. Many partners fund buyouts triggered by death or disability with insurance, which an insurance advisor can explain. Payment terms matter too: a departing partner paid over several years needs security, and the remaining partners need terms the company can afford.

How the agreement affects a future sale

When the company is sold, the agreement governs who must approve the sale, whether a majority can require the minority to sell on the same terms (a drag-along right), and whether minority partners can join a sale on those terms (a tag-along right). Without clear rules, one partner can hold up a deal or demand a larger share of the proceeds. Agree in advance how sale proceeds will be split when partners have contributed different amounts of capital or effort, and whether any partner has a right to buy the others out before an outside sale.

Buyers and their attorneys read these documents in due diligence, and gaps or open disputes can delay or reduce an offer. Reviewing the agreement a year or more before a sale avoids that. When a formal third-party business valuation is worth getting explains when a documented number helps.

Have an attorney draft it

Templates exist, but a partnership agreement is a legal document with tax and estate consequences. A business attorney can tailor it to your company and to Texas law, and your CPA can advise on how distributions and buyouts will be taxed. Each partner may want separate advice, especially where ownership or contributions are unequal. Resist copying an agreement from another company; the provisions that matter most, such as valuation, approval thresholds and payment terms, depend on your ownership, your industry and your partners' personal situations.

Review the agreement whenever ownership, roles or the company's value change significantly, and keep it with your other key company documents so it can be found quickly when it is needed.

How MDR & Associates can help partners

We do not draft legal documents, but we see the effect of good and bad partnership agreements in every sale we handle. Our formal business valuation service provides the independent number a buyout clause may call for, as a separate service with its own price. When partners decide to sell together, our sell-side representation brings several buyers to the table so the price is set by competition rather than by one partner's view. Contact us for a confidential conversation.

Where this fitsSell your business in Texas →

Questions owners ask next

Can we add a partnership agreement to a business that already exists?

Yes. Existing partners can sign one at any time, and it is usually easier while relations are good and nobody is planning to leave. A business attorney can draft it around your current ownership and roles, and your CPA can review the tax side before you sign.

How should a buyout price be set in the agreement?

Many agreements call for an independent valuation at the time of the event, using a stated method, rather than a fixed price that goes stale. Some add a formula as a fallback. The attorney drafts the clause; a valuation professional can explain which methods suit your company.