How to write a contract for business partnership

Stepping into a business venture with a partner is an exciting time, but full of paperwork. Laying out exactly what your agreement is in terms of business management, profits and decision making is a step you can’t afford to skip. This article will look at how to write a contract for a business partnership by covering the following steps:

• What is a business partnership?
• Why is a business partnership contract important?
• How to write a contract for a business partnership, section by section.

A business partnership is an arrangement between two or more people or companies to share the responsibilities, finances (both profit or loss) and operations of a business.

A business partnership contract is a legally binding document between two (or more) business partners that outlines the responsibilities (operationally and financially) of each person in the company. 

It covers any activity that the business may undertake and how it will be handled between the partners, including:

• The financials: investment from each party, percentage of profits and losses
• Rules for decision-making
• The process if one business partner decided to sell/leave the company
• How the remaining partner(s) will split the profits or losses
• Who manages the HMRC admin for the company

Like a marriage, a business partnership is rarely entered into with the idea it will fail, but a business partnership contract can guide in any situation when emotions may take over in a disagreement and protect all parties involved. This contract legally binds the partners to the terms and conditions they set out in the contract, rather than just a spoken agreement between partners.

A thorough contract for a business partnership explains each partner’s responsibilities and expectations to the other person. When running a business things can get turbulent or uncertain in times of difficulty, so it is important to draw up a contract that can serve as a guideline in these moments where panic or anger might cloud your judgement. 

Equally a business partnership contract can be a guiding document when the business starts to grow. It can act as the basis for dividing new responsibilities or for making big decisions. The contract may also save you time in the future, as it can act as a template to build on if a new partner ever needed to be added to the business.

Always consult a legal advisor before signing a contract for a business partnership. You may have to edit it depending on what country within the UK you operate from, because the legal requirements will differ for England, Scotland, Wales and Northern Ireland. 

You can use a template as a basis for writing a business partnership contract, or a simple Word document will work too. These are the core sections to include in your contract:

List all abbreviations and terms you will be using throughout the document so anyone reading can understand any industry terms or references.

State the company name and name the partners in the business. There can be more than two people in a partnership, and it’s also possible to have a business as your partner. Ensure the information here matches the details you have registered with HMRC when setting up the partnership.

Then state the place of business. This is the official registered address of the business, which can be a home address if you are a home-based company or the address of your joint office/workplace.

Lay out how much each individual contributed to start up the business. Include both the total cash value and what the percentage each contribution was of the total capital you raised. 

This information can determine the percentage that each party owns in the business, and how interest, profit and loss are split. Write a few sentences on each financial area and how it will be divided.

In this section you might include a ‘withdrawal’ clause, that details what any party needs to do if they want to pull the funding they’ve contributed, or if they can’t.

Write in detail how decisions will be made between you and your partner(s). Maybe any decision must be made by a unanimous vote (all agree) or a majority if there are more than two people involved.

Include financial decisions too. Do both partners have equal weight in making a financial decision, or does the partner with the largest share in the business have the deciding vote? You might even agree to bring in a third party for decisions that can’t be made between yourselves. 

Disagreements are a natural part of doing business, and even if partners are family, spouses or friends, it’s necessary to lay out a guideline in this section about how you will resolve any disputes.

Include information on who manages bank accounts, who will be responsible for financial reporting and who is the ‘nominated’ partner that will manage your HMRC status. If you have an accountant who will manage your tax assessments and finances, name them in this section if you have them on board already.

This list will give you a strong basis for a business partnership contract, but it is not an exhaustive list. Consult a legal advisor who can personalise your partnership contract to your business, and make sure it meets the regulations for the type of partnership you have, and the country you operate in.

Now that you are clued up on how to write a contract for your new business partnership, learn how Countingup can help you save time and money on financial admin. The business current account and accounting app provides instant invoicing and automated bookkeeping features, saving business owners hours of time-consuming admin and helping thousands keep on top of their finances. Find out more here.