MAKE YOUR FREE Partnership agreement

Use this partnership agreement when you and one or more other individuals want to create - or have already created - a business in partnership with each other and you want to make clear:

• the partners' capital contributions
• how profits are split
• how decisions are made
• what is expected of the partners
• what happens if a partner wants to leave

This partnership agreement covers:

• who the partners are
• partners' capital contributions and profit shares
• partners' duties and entitlements
• management and decision-making
• partners leaving

A partnership agreement is used when two or more partners engage in a business with a view to making a profit. It sets out each partner's rights and responsibilities, provisions for running the business day-to-day and what happens if a partner dies or the partnership dissolves.

A partnership agreement sets out how your business will prepare for common business scenarios, plan how a partner may leave, or handle disproportionate partnership contributions. Setting up clear business expectations will help partners avoid future misunderstandings. Other terms may include buy-out options and how the partnership can be dissolved.

A partnership is a relationship between two or more partners carrying out a business with a view to making a profit. A partnership, unlike a company, is not a separate legal entity.

Partners can be individuals, companies and limited liability partnerships (LLP).

A capital account is where partners contain following types of transactions:

• contributions of their initial and subsequent investments (capital)
• any interest payable on his share of the partnership capital

A partnership can maintain a single partnership capital account for all the partners. However, it is easier to maintain separate capital accounts within the accounting system for each partner as in the event of a liquidation of the business or a departure of a partner it is easier to determine the amount of payments and liabilities for each partner. Also, partners cannot withdraw any capital money from the account while in partnership unless they have a written consent of all of the partners.

Each partner's share of any profit will be credited to the current account. Any share of loss, withdrawals by the partner or tax payments will be debited from this account.

The partners will share the profit and bear any losses for any partnership for any partnership year, eg each period of 12 months ending on the accounting reference day or any other period determined by partners. An accounting period is usually a 12 month period for which the partnership has to prepare accounts.

Partners may exit the partnership:

• by voluntarily retiring
• by involuntary retiring. This applies if a partner dies or or if the partners require them to retire as a partner as they have not been able to perform his duties for a long period.
• by written notice of expulsion. A partner can be expelled from a partnership for: serious breaches of the partnership agreement; if a bankruptcy order is made against them; if they have failed to pay money owed to the partnership within 10 business days or if they no longer hold a necessary professional qualification.

Each leaving partner:

• must pay into the partnership's bank account all sums that are due from him to the partnership
• must return all accounting records, letters and other relevant documents in his possession
• (if specified in the agreement) may not solicit customers, entice away employees or engage in competing business

Yes, partners who are individuals pay Income Tax and National Insurance through Self Assessment. If a partner is a company, it must be registered with HMRC for Corporation Tax.

Ask a lawyer for:

• carrying out your business through a limited company or another type of organisation
• any partner that is not an individual (eg one is a company or limited liability partnership)
• tax-related advice

This partnership agreement is governed by the law of England and Wales or the law of Scotland.