Most business partnerships start with optimism and shared vision. Partners agree on the concept, divide responsibilities, and begin operations without formalizing the arrangement in writing. This works until it doesn't.
Disputes arise over decision-making authority, profit distribution, time commitment, or strategic direction. Without a written partnership agreement defining these terms, Florida's default partnership law governs. Those default rules rarely align with what partners actually intended.
A partnership agreement is your governance document. It defines ownership percentages, decision-making processes, profit allocation, and procedures for resolving disputes or exiting the partnership. Getting this right at formation prevents expensive conflicts later.
Why Partnership Agreements Matter
Florida law recognizes partnerships formed by conduct. When two or more people carry on a business for profit as co-owners, a general partnership exists—even without written agreement or formal filing. The Uniform Partnership Act governs these relationships by default.
Default partnership rules create equal ownership and equal decision-making authority regardless of capital contribution or time commitment. Profits split equally, major decisions require unanimous consent, and each partner has authority to bind the partnership contractually.
These default terms work for some partnerships. They create problems for most.
"I've represented both sides of partnership disputes. The ones that become litigation almost always involve partnerships that never formalized their arrangement in writing. They started as friends or colleagues who trusted each other, so they didn't see the need for legal documentation. Six months or a year later, they're fighting over who contributed what, who has decision-making authority, and what the profit split should be."
What Partnership Agreements Accomplish
Written partnership agreements serve several critical functions:
- Define ownership structure: Document capital contributions and ownership percentages to avoid future disputes about who owns what.
- Establish decision-making authority: Specify which decisions require unanimous consent, majority vote, or can be made unilaterally.
- Set profit distribution rules: Determine how and when profits are allocated among partners.
- Create exit mechanisms: Define procedures for partners who want to leave or need to be removed.
- Provide dispute resolution procedures: Establish processes for resolving disagreements without litigation.
- Address death, disability, and divorce: Plan for life events that affect partnership composition.
Verbal Agreements Are Not Enough
Verbal partnership agreements are legally enforceable in Florida, but they're nearly impossible to prove when disputes arise. Each partner remembers the conversation differently. Without written documentation, courts default to statutory partnership rules rather than what partners claim they agreed to verbally.
Written agreements eliminate ambiguity. They document the actual terms partners agreed to and provide clear guidance when questions arise.
Types of Business Partnerships in Florida
Florida recognizes several partnership structures, each with different liability protection and operational characteristics.
General Partnership
General partnerships form automatically when two or more people operate a business for profit as co-owners. No filing is required. Each partner has unlimited personal liability for partnership debts and obligations.
General partnerships work for low-risk ventures between partners who want simplicity, but the unlimited liability makes them unsuitable for most businesses.
Limited Partnership (LP)
Limited partnerships include general partners (who manage operations and have unlimited liability) and limited partners (who invest capital but have no management role and limited liability).
LPs require filing a certificate with Florida's Division of Corporations. They're commonly used for real estate investments and private equity funds where some investors want passive involvement.
Limited Liability Partnership (LLP)
LLPs provide liability protection for all partners while maintaining partnership tax treatment. Partners aren't personally liable for partnership debts or other partners' malpractice or negligence.
Florida restricts LLPs to professional service firms—attorneys, accountants, architects, and other licensed professionals. LLPs require registration with the Division of Corporations and maintaining minimum insurance or capital requirements.
Limited Liability Company (LLC)
Multi-member LLCs are taxed as partnerships by default but provide liability protection similar to corporations. LLCs offer more flexibility than traditional partnerships and are the preferred structure for most multi-owner businesses.
Partnership vs LLC: Which Structure?
For most businesses with multiple owners, LLCs provide better liability protection than general partnerships without significantly more complexity. However, certain professionals (like lawyers) may be required to operate as LLPs rather than LLCs.
The partnership agreement concepts discussed in this guide apply equally to LLC operating agreements. The structural principles transfer directly.
| Partnership Type | Liability Protection | Formation | Best For |
|---|---|---|---|
| General Partnership | None - unlimited personal liability | Automatic - no filing required | Low-risk ventures, temporary projects |
| Limited Partnership | Limited partners protected, GP exposed | File certificate with state | Real estate investments, private funds |
| LLP | All partners protected | File registration with state | Professional service firms |
| Multi-Member LLC | All members protected | File articles with state | Most multi-owner businesses |
Capital Contributions and Ownership Structure
Partnership agreements should document each partner's initial capital contribution (cash, property, services, or intellectual property) and the resulting ownership percentage.
Initial Capital Contributions
Specify what each partner contributes at formation:
- Cash contributions: Document exact amounts and timing
- Property contributions: Identify property contributed and its agreed valuation
- Service contributions: Define service value and whether it vests immediately or over time
- Intellectual property: Document IP transferred to the partnership and its valuation
Valuing non-cash contributions creates potential disputes. Partners contributing property or services often overvalue their contributions relative to cash-contributing partners. Address valuation methodology explicitly in the agreement.
Additional Capital Contributions
Define procedures for additional capital contributions if the partnership needs more funding:
- Are additional contributions mandatory or optional?
- What happens if a partner can't or won't contribute additional capital?
- Do additional contributions change ownership percentages?
- What return or preference do contributing partners receive?
Without these provisions, partnerships face challenges when additional capital is needed. Some partners may have resources to contribute while others don't, creating tension and potential ownership disputes.
Capital Accounts and Partnership Equity
Each partner's capital account tracks their equity in the partnership, including initial contributions, additional contributions, allocated profits and losses, and distributions received.
Capital accounts determine each partner's share of partnership value upon exit or dissolution. Maintaining accurate capital accounts is essential for tax reporting and buyout calculations.
Ownership vs Profit Sharing
Ownership percentage and profit sharing don't need to be identical. Partners can own 50/50 but allocate profits 60/40 based on work contribution or other factors.
Distinguish between these concepts in the agreement and define both clearly.
Profit and Loss Allocation
Partnership agreements should specify exactly how profits and losses are allocated among partners. This is distinct from when distributions are actually made to partners.
Allocation Methods
Common profit allocation structures include:
- Pro-rata allocation: Profits allocated proportionally to ownership percentage (50% owner receives 50% of profits)
- Equal allocation: Profits split equally regardless of ownership percentage
- Tiered allocation: Different allocation percentages at different profit levels
- Performance-based allocation: Allocation varies based on individual partner contributions or metrics
Loss Allocation
Losses are typically allocated the same way as profits, but agreements can provide different treatment. This matters for tax purposes—partners can use allocated losses to offset other income on their personal returns.
Distribution Timing and Amounts
Profit allocation determines each partner's share of partnership income for tax purposes. Distribution provisions determine when partners actually receive cash.
These are separate decisions. A partner might be allocated 40% of $100,000 in profits ($40,000 of taxable income) but only receive $20,000 in distributions if the partnership retains the other $20,000 for working capital.
Partnership agreements should address:
- How frequently distributions are made (quarterly, annually, or as determined by partners)
- Whether distributions are mandatory or discretionary
- Minimum distribution requirements (often to cover partners' tax liability on allocated income)
- Priority of distributions if insufficient funds exist to distribute to all partners
"Tax distributions are critical in partnership agreements. If a partner is allocated $50,000 in partnership income but receives no distribution, they still owe taxes on that $50,000. Good partnership agreements guarantee minimum distributions sufficient to cover partners' tax obligations even if the partnership retains most profits for operations."
Decision-Making Authority and Voting Rights
Partnership agreements must define which partner or partners have authority to make decisions and what level of approval different decisions require.
Categories of Decisions
Most partnership agreements create different approval requirements for different decision types:
Ordinary Business Decisions
Day-to-day operational decisions typically don't require formal approval. Define which partner or partners have authority to make these decisions unilaterally.
Major Decisions Requiring Majority Approval
Significant decisions might require majority (more than 50%) partner approval:
- Hiring senior employees above certain compensation levels
- Entering contracts above specified dollar thresholds
- Making capital expenditures above certain amounts
- Pursuing new business lines or markets
Extraordinary Decisions Requiring Unanimous Consent
Fundamental decisions typically require all partners' approval:
- Amending the partnership agreement
- Admitting new partners
- Selling substantially all partnership assets
- Merging with or acquiring other businesses
- Dissolving the partnership
- Taking on debt above specified thresholds
Voting Rights
Define how voting rights are allocated:
- Per capita voting: Each partner gets one vote regardless of ownership percentage
- Ownership-based voting: Voting power proportional to ownership interest
- Hybrid approaches: Per capita voting for some decisions, ownership-based for others
The chosen method significantly affects partnership dynamics. In a 51/49 ownership split with ownership-based voting, the 51% owner controls all non-unanimous decisions. With per capita voting, both partners have equal say.
Veto Rights and Protective Provisions
Minority partners often negotiate veto rights over certain decisions to protect their interests. These protective provisions give minority partners blocking power on specific topics even if they lack majority voting power.
Common protective provisions include requiring minority partner consent to issue new ownership interests (preventing dilution), incur debt above thresholds, or change business direction significantly.
Management Structure and Daily Operations
Partnership agreements should define who manages day-to-day operations and what authority that management has.
Managing Partner vs Management Committee
Partnerships typically use one of these management structures:
Single Managing Partner
One partner is designated managing partner with authority to run daily operations without consulting other partners on routine matters. Non-managing partners remain involved in major decisions but don't handle day-to-day management.
This works well when one partner has significantly more operational expertise or time availability.
Multiple Managing Partners
All partners (or a subset of partners) share management responsibilities. Define how management duties are divided and what happens when managing partners disagree.
Management Committee
Larger partnerships sometimes create management committees with delegated authority to make specified decisions. Define committee composition, meeting frequency, and decision-making procedures.
Compensation for Management
Partners who devote significantly more time to partnership operations often receive additional compensation beyond their profit share. Partnership agreements should address:
- Whether managing partners receive guaranteed payments (salary)
- How management compensation is determined and when it can change
- Whether management compensation reduces partnership profits before allocation
Authority to Bind the Partnership
In general partnerships, each partner has apparent authority to bind the partnership contractually. This creates risk—one partner can commit the partnership to contracts other partners oppose.
Partnership agreements should specify:
- Which partners can sign contracts on behalf of the partnership
- Dollar thresholds requiring multiple partner approval
- Contract types requiring specific authorization
- Procedures for reviewing proposed agreements
Buyout Mechanisms and Exit Planning
Partnership agreements must address how partners exit the partnership, voluntarily or involuntarily. Without clear buyout provisions, partnership dissolution may be the only option when a partner wants to leave.
Voluntary Withdrawal
Define procedures for partners who want to exit:
- Notice requirements: How much advance notice must departing partners provide
- Timing restrictions: Blackout periods when withdrawal isn't permitted
- Valuation methodology: How departing partner's interest is valued
- Payment terms: Whether buyout is paid immediately or over time
- Non-compete obligations: Restrictions on competing after departure
Involuntary Removal
Establish grounds and procedures for removing partners:
- Circumstances justifying removal (misconduct, nonperformance, legal issues)
- Voting requirements for removal decisions
- Whether removed partners receive full fair market value or discounted value
- Notice and appeal procedures
Death, Disability, and Bankruptcy
Address what happens when partners die, become disabled, or file bankruptcy:
Death
Specify whether the partnership continues with deceased partner's heirs as partners or whether remaining partners must buy out the deceased partner's interest. Define valuation and payment terms.
Consider requiring partners to maintain life insurance with the partnership as beneficiary to fund death buyouts.
Disability
Define disability (often inability to perform duties for specified period) and procedures for buying out disabled partners' interests. Address temporary vs permanent disability differently.
Bankruptcy
Partner bankruptcy typically triggers forced buyout provisions. Specify valuation approach and whether bankrupt partners receive discount.
Valuation Methodology
Buyout provisions are only as good as the valuation methodology. Common approaches include:
- Formula valuation: Agreement specifies formula based on revenue, EBITDA, or other metrics
- Appraisal: Independent appraiser determines fair market value
- Mutual agreement: Partners negotiate price (with appraisal as fallback)
- Book value: Value based on partnership financial statements
Each approach has advantages and drawbacks. Formula valuations are predictable but may not reflect actual value. Appraisals are accurate but expensive. Book value is simple but often undervalues growing businesses.
Right of First Refusal
Most partnership agreements include rights of first refusal allowing remaining partners to purchase a departing partner's interest before it can be sold to outsiders. This prevents unwanted third parties from becoming partners.
ROFR provisions should specify matching rights (remaining partners match third-party offers) or valuation procedures if no third-party offer exists.
Payment Terms
Buyout payment structure significantly affects both departing and remaining partners:
- Lump sum payment: Full payment at closing (requires partnership liquidity or financing)
- Installment payments: Payment over time (2-5 years typical) with interest
- Earnout provisions: Portion of payment contingent on future partnership performance
Balance departing partners' need for liquidity against remaining partners' ability to pay without crippling the business.
Dispute Resolution and Deadlock Provisions
Even well-drafted partnership agreements don't prevent disagreements. The agreement should establish procedures for resolving disputes before they escalate to litigation.
Dispute Resolution Procedures
Multi-step dispute resolution provisions typically include:
Internal Negotiation
Require partners to attempt good-faith negotiation before pursuing formal dispute resolution. Specify timeframe for negotiation period.
Mediation
Require mediation with neutral third-party mediator before arbitration or litigation. Mediation is less expensive than litigation and often resolves disputes.
Arbitration
Many partnership agreements require binding arbitration rather than litigation. Arbitration is faster and more private than court proceedings but limits appeal rights.
If including arbitration provisions, specify arbitration rules (AAA, JAMS), location, number of arbitrators, and cost allocation.
Deadlock Provisions
Equal ownership partnerships (50/50) risk deadlock when partners fundamentally disagree on major decisions. Partnership agreements should include deadlock resolution mechanisms:
- Tie-breaker: Designate third party to break ties (works for specific decisions but not fundamental disputes)
- Shotgun clause: One partner offers to buy out the other at specified price; other partner must either sell at that price or buy at that price
- Dissolution: Deadlock triggers partnership dissolution and asset sale
- Appraisal buyout: Independent appraisal determines value and partners bid for the right to buy out the other
"Shotgun clauses sound fair in theory—both partners have equal ability to offer a price. In practice, they favor the partner with more capital or better financing access. The partner with resources can make a high-ball offer knowing the other partner can't match it. I prefer appraisal-based mechanisms for equal partnerships."
Dissolution and Wind-Down Procedures
Partnership agreements should address how the partnership dissolves and winds down operations if partners decide to terminate the business.
Dissolution Triggers
Specify events that trigger dissolution:
- Unanimous partner vote to dissolve
- Expiration of partnership term (if partnership has defined duration)
- Withdrawal of partner if partnership agreement provides
- Bankruptcy of the partnership
- Achievement of partnership purpose
Wind-Down Procedures
Define how dissolution is managed:
- Who manages the wind-down process
- Whether business continues temporarily to complete projects
- How assets are liquidated
- Priority of creditor payments
- Distribution of remaining assets to partners
Asset Distribution
Upon dissolution, partnership assets are typically distributed in this order:
- Payment of partnership debts to external creditors
- Payment of debts owed to partners (loans partners made to partnership)
- Return of partners' capital contributions
- Distribution of remaining assets according to profit-sharing percentages
Partnership agreements can modify this default distribution order, but external creditors always have priority over partners.
Common Partnership Agreement Mistakes
1. Failing to Document the Agreement in Writing
Verbal partnerships are legally valid but practically unenforceable. Without written documentation, disputes turn into credibility contests about what partners originally agreed to.
2. Using Generic Templates Without Customization
Online partnership agreement templates provide starting points but rarely address specific partnership circumstances. Partners with unequal capital contributions, different time commitments, or unique business models need customized agreements.
3. Ignoring Tax Implications
Partnership agreements have significant tax consequences. Profit allocation provisions, guaranteed payments to partners, and expense reimbursement policies all affect how partnership income is taxed. Draft agreements in coordination with tax advisors.
4. Inadequate Exit Planning
Many partnership agreements address formation extensively but give minimal attention to exit procedures. Buyout provisions, valuation methodology, and payment terms require as much thought as initial formation terms.
5. Ambiguous Decision-Making Authority
Vague provisions about partner authority create operational paralysis or unauthorized commitments. Clearly define who can make which decisions without consulting other partners.
6. No Dispute Resolution Procedures
Partnership agreements that don't include dispute resolution mechanisms force partners into expensive litigation when conflicts arise. Mediation and arbitration provisions provide more efficient alternatives.
7. Failing to Address Death or Disability
Without provisions for death or disability, partnerships may be forced to continue operating with deceased partners' heirs or incapacitated partners. This creates operational and legal complications.
8. Not Updating the Agreement
Partnership agreements should evolve as circumstances change. Adding partners, changing business models, or modifying profit allocation requires updating the agreement. Annual reviews ensure the agreement remains current.