Who can use this 3-way partnership agreement?

A 3-way partnership agreement is suitable either for the establishment of a new partnership or for normalizing an existing partnership of three partners.

What is a 3-way partnership agreement for?

To record the terms agreed between the partners, one needs to establish a three-person partnership, or formalize an existing partnership, and want to set out your relationship to the other parties, your mutual obligations, and the rules governing the conduct of the partnership business. Unlike a limited company, a 3-way partnership agreement has no articles of association so the way it is owned and managed needs to be agreed by the partners.

What are the main points for a 3-way partnership agreement?

  • Name and business of partnership
  • What is the partnership called and what is the main purpose of the business
  • Partnership capital
  • What is the capital of the partnership and how much is contributed by each partner
  • Profits and Losses
  • What share of profits and losses will each partner have. (Capital and profit shares are not always the same)
  • Drawings
  • How much can each partner draw from the income each month on account of their share of profits.
  • Decision making
  • Rules for partnership meetings and voting rights of partners
  • Accounts
  • Arrangements for annual and management accounts, who has signing rights on the bank account etc.
  • Introduction of new partners, retirement and removal of existing partners
  • How are these decisions reached, notice periods and how are capital and profits paid out to former partners
  • Restrictions
  • Rules preventing a partner or former partner from competing with the firm.

Aspects of a 3-way partnership agreement

A 3-way partnership agreement is a legally binding document that outlines business operations, ownership stakes, financials and decision-making details.

  • When coupled with other legal entity documents, business partnership agreements could limit liability for each partner.
  • 3-way partnership agreements should always be written or reviewed by legal counsel before they are signed.
  • This article is for business partners who want to formalize their partnership with an airtight business partnership agreement.
  • A 3-way partnership agreement is a document that establishes clear business operation rules and delineates each partner’s role. These agreements are enacted to resolve disputes, delineate responsibilities, and define how to allocate profits and losses.
  • Any 3-way partnership agreement in which two or more people own a stake in the company should have a business partnership agreement. This legal document provides critical guidance in a company’s operations.

What is a 3-way partnership agreement?

A 3-way partnership agreement is a legal document between two or more business partners that spells out the business’s legal structure and purpose. It outlines the following information:

  • Individual partners’ responsibilities
  • Capital contributions
  • Partnership property
  • Each partner’s ownership interest
  • Decision-making conventions

The 3-way partnership agreement also outlines what steps will be taken if one business partner decides to sell their interest or leave the company and how the remaining partner or partners would split profits and losses.

“I highly suggest formal 3-way partnership agreements are put in place as businesses evolve from solo practices into a partnership or ensembles,” said Rich Whitworth, former head of business consulting for Cetera Financial Group. “The biggest reason is that it establishes the ‘rules of engagement’ between the business and its owners … and lays out a road map on how to deal with entity-level issues.”

While businesses seldom begin with concerns about a future partnership dispute or how to dissolve the business, business partnership agreements are essential in situations in which emotions might otherwise take over. A written, legally binding agreement is an enforceable document instead of a spoken agreement between partners.

How to write a 3-way partnership agreement

A 3-way partnership agreement must include all foreseeable issues regarding the business’s co-management. The easiest way to prepare a business partnership agreement is to hire an attorney or to find a customizable template. If you’re writing your own agreement, find a template for a company that’s similar to the business you’re starting.

A 3-way partnership agreement should follow a logical process and include the following information:

  • Business generalities. Start by stating the business’s name, its legal structure and the business’s location (i.e., which state’s laws will govern it).
  • Business operations. State the partnership’s purpose, and explain the activities the business will and will not engage in.
  • Ownership stake. Spell out the percentage of the business that each partner owns. Enumerate each partner’s rights and responsibilities.
  • Decision-making process. Outline how decisions are made and the responsibility of each partner in the decision-making process. Include who has financial control of the company and who must approve the addition of new partners. Also include information on how profits and losses are distributed among the partners.
  • If the business partnership is set up as an LLC, the 3-way partnership agreement should limit the liability each partner faces in the event of a business lawsuit. To do so effectively, a partnership agreement should be paired with other documents, such as articles of incorporation. A business partnership agreement alone is likely not enough to fully protect the partners from liability.
  • Dispute resolution. Any business partnership agreement should include a dispute-resolution process. Even if you’re working with family or best friends, disagreements are common in business.
  • Business dissolution. If one or more partners choose to dissolve the business, a 3-way partnership agreement should outline how that dissolution will occur. It should spell out the procedures for partners to join or leave the partnership. It should also outline continuity or succession planning for partners leaving the business.
  • Explain how the partnership’s finances (including small business taxes) will be managed.
  • Once you’ve spelled out everything in detail, each partner must sign the agreement for it to take effect.
  • Tip: To ensure your 3-way partnership agreement adequately covers all business liabilities, closely involve your legal counsel while developing and reviewing the agreement, even if you’re working from a template.

The stages of a 3-way partnership agreement

A 3-way partnership agreement doesn’t have to be set in stone, especially as a business grows and develops. You’ll be able to add to the agreement, especially if unforeseen circumstances occur. According to Whitworth, there are four primary stages to consider.

  • Initial partnership: This stage involves creating the initial business partnership agreement as described above. You’ll draft an agreement that governs the business’s general operations, decision-making process, ownership stakes and management responsibilities.
  • Addition of limited partners: As a business grows, it might have the opportunity to add new partners. According to Whitworth, the original partners might agree to a “small carve-out of minor equity ownership” for the new partner, as well as limited voting rights that give the new partner partial influence over business decisions.
  • Addition of full partners: Sometimes you’ll want to promote a limited partner to a full business partnership. A business partnership agreement should include the requirements and process for elevating a limited partner to full partner status, complete with full voting rights and influence equal to that of the original partners.
  • Continuity and succession: At some point, founders may retire or leave the company without wanting to dissolve it. If you didn’t include continuity and succession planning initially, it’s crucial to outline your plan. Describe how ownership stake and responsibilities will be distributed among the remaining partners after the departing partners take their leave.

“3-way partnership agreements need to be well crafted for myriad reasons,” said Laurie Tannous, owner of law firm Tannous & Associates Inc. “One main driver is that the desires and expectations of partners change and vary over time. A well-written partnership agreement can manage these expectations and give each partner a clear map or blueprint of what the future holds.”

Free 3-way partnership agreement templates

3-way partnership agreement templates are available for free online. These resources can help you draft your agreement, but you should have legal counsel review your draft and help you revise and finalize the document before you sign it.

Once a lawyer confirms that your business partnership agreement is thorough and legally binding, you and your partners can sign it to make it official.

3-way partnership agreements mistakes to avoid

3-way partnership agreements are complex documents. Unfortunately, many people get bogged down in details and make crucial startup mistakes in their partnership agreement.

Here are some common mistakes to avoid:

  • Skipping key details. Partnership agreements typically include some complex language around specific topics, and people may leave out this language if they don’t understand it. Don’t assume something isn’t necessary just because it reads like fine print.
  • Trusting things will work out. People tend to go into business with people they like and trust, leading them to think there won’t be problems later. A partnership agreement exists to resolve these issues when they inevitably arise.
  • Not having the agreement reviewed by counsel. Partnership agreements can vary by state and industry, and laws and best practices are constantly changing. If you choose not to have an attorney draft your agreement, at least have one review it before you sign the document.
  • Not amending the agreement later. Partnerships evolve, and governing documents must be updated periodically to reflect the changing business. Otherwise, there may be issues that the document can’t resolve.
  • Not forming separate partnerships for new ventures. Creating a business is expensive and time-intensive. Sometimes when a partner has an idea for a new business, their first thought is to make it part of their existing partnership. However, this keeps partners from compartmentalizing their liability. Often, their existing partnership agreement isn’t structured to govern new and different businesses.

Business 3-way partnership agreement formalize the relationship between partners and enumerate their rights and responsibilities. This limits partner liability and helps resolve disputes. Failing to draft an appropriate agreement can lead to problems later, including significant personal liability.

Why do you need a 3-way partnership agreement?

A 3-way partnership agreement establishes a set of agreed-upon rules and processes that owners sign and acknowledge before problems occur. If any challenges or controversies arise, the business partnership agreement defines how to address them.

“A business partnership is just like a marriage: No one goes into it thinking that it’s going to fail, but if it does fail, it can be nasty,” said Jessica LeMauk, marketing director at Voxtur. “With the right agreements in place, which I’d always recommend be written by a qualified attorney, it makes any potential problems of the business partnership much more easily solved and/or legally enforceable.”

In other words, a 3-way partnership agreement protects all partners if things go sour. By agreeing to a clear set of rules and principles at the partnership’s outset, partners exist on a level playing field developed by consensus and backed by law.

Business partnership agreements level the playing field

A well-crafted, airtight 3-way partnership agreement clarifies each partner’s expectations, duties and obligations. In business, things change constantly, so it’s crucial to establish a business partnership agreement that can serve as a grounding force in turbulent or uncertain times. A 3-way partnership agreement also defines how the business should grow and governs the addition of new partners.

If you’re going into business with a partner, establish a business partnership agreement while incorporating as an entity. Even if it seems unnecessary today, when an issue arises, you’ll be glad you had an agreement in place.

What does a 3-way partnership agreement entail?

A 3-way partnership agreement is a contract between two or more business partners. The partners use the agreement to outline their rights responsibilities, and profit and loss distribution. The agreement also sets the general partnership rules, like withdrawals, capital contributions, and financial reporting.

A 3-way partnership agreement involves two or more general partners who have formed a business for profit. Each partner is equally liable for the debts and obligations of the company and the actions of the other partner(s). A partner doesn’t need to be an individual. A partner can also be a corporation or another business entity. It’s important to specify a partner’s legal status because it can have tax implications.

Any three people who run a for-profit business together, including family, spouses, friends, or colleagues, should have a Partnership Agreement. A 3-way partnership agreement sets out guidelines and rules for business partners to follow to avoid disagreements or issues in the future.

Why is having a 3-way partnership agreement valuable?

A 3-way partnership agreement is valuable because it sets out each partner’s rights and responsibilities. Further, it allows the partners to customize the law as it applies to their partnership.

Although it’s perfectly legal not to have a 3-way partnership agreement, they come with their advantages. Without a 3-way partnership agreement in place, your business is subject to the standard statutes on partnerships in your state. In the United States, 37 states follow the Revised Uniform Partnership Act, and it might have provisions that aren’t suitable for your particular partnership or business. By creating your own agreement, you take control of the specifics and customize the applicable law to suit your company perfectly.

For example, a partner leaving the company will cause the dissolution (or end) of the partnership in some states. With a customized 3-way partnership agreement, you can include clauses to ensure that the default rule doesn’t apply to your partnership. Instead, you can make it possible for the remaining partners to buy out the exiting partner’s interest in the partnership.

What should I include in a 3-way partnership agreement?

Before you begin creating your 3-way partnership agreement, there are some crucial details about the partnership to sort out with your partners.

Have details regarding the following topics on hand when creating your document:

  • Capital contributions
  • Profit and loss distribution
  • Management and voting
  • Partnership tax elections
  • Partnership withdrawal
  • Partnership dissolution

How do I create a 3-way partnership agreement?

  1. Specify the type of business you’re running

Start the creation of your Partnership Agreement by specifying the industry your business is in and the type of business it is.

Examples of types of industries:

  • Retail
  • Professional services
  • Food and accommodations
  • Arts, entertainment, recreation
  • Other (if your business doesn’t fall under any of the industries listed)

Your business type can be described by the service you’re providing (e.g., bookkeeping, clothing store, dine-in restaurant).

  1. State your place of business

Different states have varying rules and regulations for partnerships. Select the state you’re operating in, and the relevant site will customize your Partnership Agreement to meet its requirements.

  1. Provide partnership details

Include your partnership’s name and address in the agreement. Before selecting a name for your partnership, it’s recommended that you perform a business name search to avoid choosing one that sounds similar to another business in your industry. Business name registration laws prohibit businesses from having similar names because it can confuse customers.

Include the partnership’s address, city, state, and ZIP code in your agreement. The address is usually the location of your business’ main office or headquarters. You can use one of the partners’ home addresses if your business doesn’t have a premises.

  1. State the partnership’s duration

State the date that the partnership will begin and how it will end, if you know. You can choose to end the partnership on a specific date or when the partners decide to dissolve the partnership.

  1. Provide each partner’s details

Provide the name and address of each partner, and specify if they’re an individual, corporation, partnership, trust, or LLC.

  1. State each partner’s capital contributions

Capital contributions are the amount of time, money or assets each partner gives to the business or partnership. The more a partner contributes, the more equity interest they’ll have in the company. Each partner receives a percentage of ownership based on their capital contribution as per the 3-way partnership agreement.


Specify the monetary value of each contribution in your 3-way partnership agreement. The capital contributions can come in the form of cash, equipment, time and effort (in place of cash equity) or in some other way (e.g., a free loan of a personal vehicle to partnership).

A 3-way partnership agreement can include non-monetary contributions as long as the partners can calculate and agree on the contributions’ value. Also, include the date that initial capital contributions are due.

  1. Outline the admission of new partners

If you and your partners allow new members, specify how you’ll decide on admissions to the partnership in the 3-way partnership agreement.

  1. Outline how a partner can voluntarily withdraw from the partnership

If the partnership contract permits withdrawal, a partner may make an amicable exit so long as they adhere to the agreement’s notice period and other terms specified. If a partner wishes to withdraw, they can do so using a notice of withdrawal from partnership form.

Our questionnaire allows you to set the necessary notice period at three months, six months, one year, or two years. It’s a good idea to set notices because a partner’s departure can have huge consequences for the business, especially in a 3-way partnership agreement. You can also decide if a partner leaving will automatically cause dissolution of your partnership.

  1. Determine terms for the partnership’s dissolution

Dissolving a 3-way partnership agreement is a significant decision that may have varying consequences for each partner. It’s generally recommended that your partnership require a unanimous vote to dissolve it.

Some of the most common reasons partners may dissolve a 3-way partnership agreement include:

  • All partners agree on a specified end date for their partnership
  • The partnership completed all its projects or fulfilled its purpose
  • The business is no longer profitable
  • The death of a partner
  • The bankruptcy of a partner or the partnership
  • A partner withdraws from the partnership

How the partners distribute the business’ assets on dissolution can factor into how each member votes in the decision to dissolve the partnership.

The options for distributing assets among the partners in a 3-way partnership agreement are:

  • Equal shares for each partner
  • In proportion to capital contributions
  • Fixed percent
  1. Set rules for calling partners meetings

A partners’ meeting is when the members of a partnership come together to make critical business and financial decisions as stipulated under the 3-way partnership agreement. Decide if the partners will hold meetings weekly, monthly, quarterly, annually, or as required. You’ll also need to determine if special meetings can be called by any partner or a majority of partners.

  1. Appoint a managing partner under the 3-way partnership agreement

A managing partner is responsible for the overall management and day-to-day operations of the partnership. They’re also someone who has an ownership interest in the 3-way partnership agreement. Decide if a managing partner will be appointed or if all the partners will participate in managing day-to-day operations. You’ll then need to decide if a unanimous or majority vote of the partners can remove the managing partner from their position. Certain matters will still require a partners’ vote even if the partners appoint a managing partner.

  1. Determine the voting method under the 3-way partnership agreement

Partners are jointly liable for decisions made on behalf of the 3-way partnership agreement, even if they weren’t involved or consulted. Some decisions can change the nature of your business, which can bring unanticipated risk to partners that aren’t as financially secure as the others. When making decisions with a vote, you can give some partners more power than others. Determine if voting power is based on a partner’s proportion of aggregate capital contributions, the proportion of profit shares, or if they’ll all have equal voting power (one partner, one vote).

  1. Decide which partners have signing authority under the 3-way partnership agreement

Any person who has the authority to sign contracts on the partnership’s behalf can significantly impact your business and the rest of the partners. Decide if the authority to sign contracts will be given to any partner, a managing partner, or subject to a partnership vote. The 3-way partnership agreement must communicate any variation to the presumed authority of the partners to third parties, vendors, and business associates.

  1. Outline which decisions require unanimous consent under the 3-way partnership agreement

Because some business decisions involve significant new risks for a partnership, it’s sometimes appropriate to require the consent of all partners in order to protect everyone’s interests. Some decisions that might be better off with unanimous consent include:

  • Assigning company check signatories
  • Assuming new debts over a certain amount
  • Incurring new expenses over a certain amount
  • Selling a partnership asset over a particular value
  • Hiring new employees where salary is over a certain amount
  • Firing employees
  • Releasing partnership claims except for payment in full
  • Decisions affecting the unusual use or lending of partnership equipment
  1. Determine how you’ll make significant business and financial decisions

Determine if the partnership will make business and financial decisions with a unanimous or majority vote of the partners according to your chosen voting method. Business decisions include all actions regarding the management, operation, and control of the partnership and its business. Financial decisions include distribution of profits, allocation of losses, and other financial matters.

  1. Determine the method for distribution of profits and losses

Decide how the partners will distribute the profits and losses:

  • Fixed Percent: A percentage of the profit and losses that doesn’t change. The numbers must add up to 100% between all partners.
  • Equal Share: Profits and losses are distributed evenly between partners.
  • In proportion to capital contributions: the share of profits and losses depends on how much each partner has invested.
  1. Determine if partners will receive compensation

The members of a partnership have the option to compensate a partner as they see fit for services rendered to the partnership. The compensation is in addition to the regular personal cash withdrawals that partners can take from the partnership’s earnings.

  1. Address tax elections under the 3-way partnership agreement

Federal tax audit rules allow the Internal Revenue Service (IRS) to treat partnerships as taxable entities and audit at a partnership level instead of conducting individual audits of the partners. That means that depending on the partnership’s size and structure, the IRS can treat the partnership as a taxable entity rather than auditing each partner individually.

Partnerships that have 100 or fewer partners and are not multi-tiered (i.e., which have no partners that are themselves partnerships, LLCs, or trusts) are eligible to elect out of the application of the rules on an annual basis partnership return. 3-way partnership agreements should address certain tax elections and choose a partner for the role of partnership representative. The partnership representative serves as the figurehead for the partnership under the new tax rules.

Law Depot’s Partnership Agreement explains the rules clearly and allows you to:

  • If eligible, choose whether the partnership wishes to elect out of the new tax elections. If the partnership elects out, they must renew this decision annually when filing tax returns.
  • Make the partnership representative answerable to the partners in their dealings with the IRS.
  • Elect to have each partner individually assessed for their share of the tax liability if an audit assesses a tax liability at partnership level.
  1. Appoint a partnership representative under the 3-way partnership agreement

A Partnership Representative is appointed to act on the partnership’s behalf with sole authority when dealing with audit procedures. Suppose your partnership isn’t eligible to opt-out (or chooses not to opt-out) of the tax audit rules introduced by the Federal Bipartisan Budget Act of 2015. In that case, the IRS can treat the partnership as a single taxable entity and deal with a single “Partnership Representative” at audit time. The Partnership Representative is empowered to make all audit-related decisions on the partnership’s behalf in dealings with the IRS. Individual partners no longer have statutory rights to be informed of dealings with the IRS.























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