Buying a business
What Should Be in Your Partnership Agreement
A clause-by-clause checklist for a partnership or company agreement, with the question each clause must answer before anyone signs.
By Michael D. Rubin, CEO & Founder · Updated September 2026 · 895 words
A partnership agreement should settle ownership and contributions, how profits and pay are shared, who decides what, how new money is raised, what happens when an owner dies, divorces or leaves, how a deadlock is broken and how the business can eventually be sold. Those are the points on which co-owners most often disagree, and each is far easier to agree before money or emotion is involved.
Use the checklist below with your attorney. It applies whether your business is a partnership, an LLC with a company agreement, or a corporation with a shareholders' agreement.
The clause checklist
Every row deserves a specific answer. A clause that says the partners will agree on something later settles nothing. Work through the table with your partners before you meet the attorney, so the drafting sessions are about wording rather than about deciding the business points from scratch.
| Clause | What it settles | Question to answer before signing |
|---|---|---|
| Ownership and contributions | Each owner's percentage and what they put in | Does ownership follow cash, work or a mix of both? |
| Profits, losses and pay | Distributions, salaries and draws | Is the partner who works in the business paid before profits are split? |
| Roles and authority | Who manages what, and signing limits | What can one partner spend or sign without the other? |
| Decisions and voting | Which decisions need a majority and which need everyone | Are selling, borrowing and admitting a partner unanimous decisions? |
| Capital calls | How new money is raised | What happens to an owner who cannot contribute? |
| Transfers | Sales of an owner's share to outsiders | Do the other partners get the first right to buy? |
| Death, disability, divorce | What happens to the share | Must it be sold back, and how is the buyout funded? |
| Deadlock | How a stalemate ends | Mediation, arbitration or a buy-sell mechanism? |
| Exit and valuation | How a departing owner is paid | Which valuation method and payment terms apply? |
| Competition and confidentiality | What a departing partner may do next | Can they compete, and for how long? |
Money clauses deserve the most time
Most partner disputes are about money, and they usually start with unequal effort or unequal investment. If one partner runs the business full time and the other supplied most of the capital, decide at the start how each is rewarded: a market salary for the operator before profits are divided, a preferred return on the capital, or a split that reflects both. Put the distribution policy in writing, including when distributions are paid and how much cash stays in the business first. Record every contribution as it is made, so nobody has to reconstruct it years later.
Plan for capital calls as well. Businesses need money at inconvenient moments. The agreement should say whether owners must contribute more, what happens if one cannot, and whether that partner's ownership is diluted as a result. If the purchase is financed, lenders will usually want guarantees from the owners, one more reason to agree how obligations are shared; our page on business financing outlines the usual structures.
Decision rules and deadlock
Divide decisions into ordinary ones, which the managing partner can make alone within set limits, and major ones, which need a vote. Major decisions usually include selling the company or its main assets, taking on significant debt, admitting a new partner and changing anyone's pay. Write the spending and signing limits as figures, so there is no argument later about what counts as ordinary.
Equal partners need a way out of a tie. Options include a trusted outside adviser who breaks deadlocks, mediation followed by arbitration, or a buy-sell provision under which one partner names a price for the other's share and the other must either sell at that price or buy at it. Settling a stalemate privately is far cheaper than settling it in court.
Buy-sell terms and the valuation formula
The buy-sell provision is the clause partners most often skip and most often regret. It decides what happens to an owner's share on death, disability, divorce, retirement or a falling-out, and who has the right or the obligation to buy it. Life and disability insurance is a common way to fund a buyout so the business is not drained by it. Decide as well whether a partner who stops working in the business may keep the share and simply collect distributions, which is rarely what the remaining partners want.
The weakest buy-sell clauses fix a price when the agreement is signed and never update it. Better options are a formula tied to earnings, a value the partners confirm every year, or an independent appraisal at the time of the buyout. Our guide to what a business is worth explains how private companies are valued, and a formal business valuation is the usual way to settle a partner buyout at arm's length.
Where MDR & Associates comes in
MDR & Associates represents owners selling established Texas companies with $3 million to $100 million in annual revenue, and it works with buyer groups that include several partners. Your attorney writes the agreement. What we see from across the table is that partners with a clear agreement make decisions faster and negotiate with one voice. Buyers who register with us sign an NDA and complete a financial profile before seeing details. If you are buying with partners and want to understand how a deal might be structured, contact the firm.
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Questions owners ask next
How often should partners update their agreement?
Review it whenever something significant changes: a new owner, a large loan, a change in who runs the business, or plans to sell. Partners whose agreement uses an agreed buyout value often confirm that figure every year, so it never drifts far from what the company is actually worth.
Can a template partnership agreement work?
A template helps you list the topics, but it will not reflect unequal contributions, one partner operating the business, a lender's conditions or family ownership. Those are the points most likely to cause disputes, so have a business attorney draft or adapt the agreement for your situation.