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What Belongs in a Business Partnership Agreement Before You Open
Two tradespeople who open a shop together usually agree on the work and leave the money, the license and the exit for later, and state partnership law has already written default answers to all three.
General information, not legal/tax/financial advice; talk to a licensed professional about your situation.
At a glance
- A partnership agreement is the written deal between co-owners on money in, pay, decisions and departures; where it is silent, the IRS treats local law as part of the agreement.
- Under the default rules in Delaware's partnership statute, which follows the Revised Uniform Partnership Act, partners split profits equally whatever each invested, have equal say in management, and are not entitled to pay for their work.
- In a study of 1,476 founders in 511 new ventures, about a third of teams split ownership equally, and equal splits made quickly were linked to lower valuations later.
- For a plumbing, electrical or HVAC shop, four moments need written answers before opening day: who owns the trucks and tools, whose license the business runs on, how each partner gets paid, and how one partner leaves.
Part 1 | The deal the statute writes for you
Partners who never sign an agreement still have one, and its terms come from state law. Delaware's version of the Revised Uniform Partnership Act gives each partner an equal share of profits, equal rights in managing the business, and no right to a salary, and it lets a majority decide ordinary matters while anything outside the ordinary course needs every partner's consent. The same statute makes each partner an agent of the business, so a partner who signs a supplier account or a truck lease in the normal course of business binds the partnership, and all partners are liable jointly and severally for its obligations.
The usual instinct at the start sounds like this: We'll split everything fifty-fifty and sort out the details when we're bigger. For two partners who put in the same money and the same hours, the defaults may be close enough, but most trades partnerships begin lopsided, with one partner bringing the license and the customer list and the other bringing the van, the cash or the evenings spent on estimates and books.
| Question | Default under the statute | What partners often assumed |
|---|---|---|
| Profit split | Equal shares, regardless of money invested | In proportion to cash and equipment put in |
| Pay for working in the business | None, other than for winding up | The partner running jobs full time draws a wage first |
| Decisions | Majority for ordinary matters; all partners for anything outside the ordinary course | The licensed partner has the final word on jobs and safety |
| Signing for the business | Each partner can bind the partnership in the ordinary course | Big purchases need both signatures |
| Liability | All partners jointly and severally liable for partnership obligations | Each partner answers for their own decisions |
Part 2 | Four moments to settle before the first service call
The trucks, tools and stock. Write down each partner's contribution, in cash and in equipment at an agreed value, and whether the van and the tools belong to the business or are lent to it. A partner who brings a $40,000 truck (assumption) and a partner who brings $40,000 in cash have made equal contributions on paper only if the agreement says so, and the agreement should also say whether that truck comes back to its owner if the partnership ends.
The license. Where a state licenses the business through one qualifying individual, the agreement needs a plan for the day that person leaves. Florida's construction licensing law, for example, ends a primary qualifying agent's status on the earlier of a new qualifier being designated or 60 days after notice reaches the licensing board, which gives the shop about two months to find a new license holder.
Pay and profit. The IRS calls payments to a partner that are set without regard to the partnership's income "guaranteed payments," the trades equivalent of a wage for running jobs, so the agreement should set each partner's guaranteed payment, how often it is paid, and how remaining profit is split after those payments and a cash reserve.
The exit. Under the statute, a partner dissociates by giving notice of an express will to withdraw, and also at death, so the agreement needs a buyout formula, a payment schedule the shop can afford, rules on taking customers or employees, and what happens to the license and the phone number.
Part 3 | Why the quick fifty-fifty split costs later
Research on new ventures suggests that an ownership split agreed quickly, before contributions are compared, deserves a second look. A study published in Management Science followed 1,476 founders in 511 ventures and found that about a third of teams divided ownership equally; equal splits were associated with lower valuations in the first outside financing, an effect strongest in teams that decided their shares quickly. The ventures studied were mostly high-growth startups rather than trades shops, so the dollar figures will not carry over, though the pattern of settling the hard question early and in writing applies to any two people sharing a business.
The pre-opening checklist, in shop terms
- Each partner's contribution: cash, trucks, tools, stock and the customer list, each with an agreed dollar value.
- Whose license the business runs on, what that partner is paid for it, and the plan if they leave or lose it.
- Guaranteed payments: weekly or monthly amount for each partner, and when they rise.
- Profit split after guaranteed payments, plus the cash reserve kept in the account before any distribution.
- Spending limits: the dollar amount above which a purchase, truck lease or new hire needs both signatures.
- Who handles estimates, scheduling, payroll and the books, and how that changes if one partner is out injured.
- Buyout: how the shop is valued, how many months the buyout is paid over, and what happens at death or disability.
- Customers, employees and the phone number after a split, including any noncompete your state allows.
- Disputes: mediation first, and who breaks a tie.
How you compare
- Equal splits: about a third of the founding teams in the Management Science study split equally; if yours did, check whether contributions and hours really are equal.
- Written agreement: the IRS treats state law as filling any gap, so a shop with no signed agreement is running on the Exhibit 1 defaults today.
- Your own baseline: list what each partner has put in and taken out since opening, which is the starting number for any buyout conversation.
Questions to ask this week
If one of us left tomorrow, whose license would the trucks be running on? If the answer is nobody's, the agreement needs a qualifier plan.
Do we each know what the other has put in? A one-page list of contributions avoids the hardest argument later.
What would a buyout cost, and could the shop pay it? A formula agreed now is cheaper than a valuation fought over later.
The next step is to fill in the nine-point checklist together, bring it to a business attorney in your state, and have it turned into a signed partnership or operating agreement before the first invoice goes out.
About this research: This article draws on IRS Publication 541, the Delaware Revised Uniform Partnership Act, Florida's construction contracting statute and a peer-reviewed study of founder equity splits in Management Science. The truck value is an assumption for illustration. State laws differ, and LLC operating agreements follow different statutes.
Sources
- Internal Revenue Service. Publication 541, Partnerships.
- State of Delaware. Delaware Code, Title 6, Chapter 15, Subchapter III, Subchapter IV and Subchapter VI.
- Florida Legislature. Florida Statutes § 489.1195, Responsibilities of qualifying agents.
- Hellmann, T. and Wasserman, N. The First Deal: The Division of Founder Equity in New Ventures. NBER Working Paper 16922 (2011); published in Management Science 63(8), 2017. 1,476 founders in 511 ventures.
Related reading: The Agreements Every Small Service Business Should Have in Writing · LLC or Sole Proprietor: What Changes for a Small Service Business? · What Small Business Disputes Cost, and How Paperwork Prevents Them
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