Finance term
Partnership Agreement
Also known as: general partnership agreement, limited partnership agreement, LP agreement, business partnership contract
Definition
A partnership agreement is the foundational governance document for general partnerships and limited partnerships, defining profit and loss allocations, capital contributions, management authority, voting rights, partner responsibilities, and dissolution mechanics. All lenders require it before approving loans to partnership entities.
Detailed explanation
Partnerships are governed by their partnership agreement plus the applicable state's Uniform Partnership Act (general partnerships) or Revised Uniform Limited Partnership Act (limited partnerships). Unlike LLCs, general partnerships provide no liability protection to general partners — each general partner is jointly and severally liable for partnership debts. Limited partnerships protect limited partners (who are passive investors) while general partners remain fully exposed.
Core provisions of a partnership agreement: (1) Capital contributions — each partner's initial investment, obligations for future contributions, and treatment of capital accounts. (2) Profit and loss allocation — can be structured in any ratio agreed upon by partners (does not need to match capital contribution percentages, but must have substantial economic effect under IRC Section 704(b) to be recognized for tax purposes). (3) Management authority — for general partnerships, which partners have authority to bind the partnership; for limited partnerships, the general partner(s) manage and limited partners are restricted from management participation (or risk losing limited liability). (4) Distributions — when cash is distributed and in what order; tax distributions for partners' liability on allocated income. (5) Dissolution and liquidation — triggers for dissolution, liquidation procedures, and distribution priorities on wind-down.
For financing, lenders require the full partnership agreement before loan closing. Key review items: who is authorized to execute loan documents on behalf of the partnership; what votes are required for borrowing; whether any existing liens, pledges, or consent requirements exist; and that all general partners sign or authorize the transaction (lenders typically require all general partners to personally guarantee partnership loans).
◈ Worked example
- Limited partnership structure: Real estate LP — one general partner (manages the properties, liable for all debts) + 10 limited partners (passive investors, liability limited to their capital contributions). LP agreement: GP receives 2% management fee + 20% carried interest after limited partners receive 8% preferred return. Lender requires GP personal guarantee on $3M construction loan.
- Equal GP dispute: Three-partner medical practice, equal 33.3% ownership. No partnership agreement in place. One partner wants to take on $500K bank loan for equipment. Bank refuses to lend without a written partnership agreement establishing authorization procedures. Partners draft agreement granting any two partners authority to approve loans under $750K.
- Tax allocation structure: Manufacturing partnership, 70% GP / 30% LP. Agreement allocates 90% of depreciation to limited partners (they're in high tax brackets and want the deduction). Cash distributions go 70/30. Under IRC 704(b) substantial economic effect rules, the special allocation must be supported by economic reality — the agreement includes deficit restoration obligations to validate the allocation.
Common questions
The most-asked questions about Partnership Agreement — answered straightforwardly.
Do all partners in a general partnership have equal authority? +
Under the Uniform Partnership Act default rules, each general partner has equal management rights and equal authority to bind the partnership — regardless of their capital contribution or profit share. The partnership agreement can modify this: authority can be delegated to a managing partner, or thresholds can require majority or unanimous consent for specific actions. Without a written agreement restricting authority, any general partner can legally bind the partnership to contracts and debts.
What is the difference between a general partnership and a limited partnership? +
In a general partnership (GP), all partners are general partners — all have management rights and all are personally liable for partnership debts. In a limited partnership (LP), there is at least one general partner (full liability, management authority) and one or more limited partners (liability limited to their investment, no management participation). Limited partnerships are commonly used for real estate investment, private equity, and fund structures where investors want liability protection without day-to-day management involvement.
Can a partnership get an SBA loan? +
Yes — both general and limited partnerships are eligible borrowers under SBA 7(a) and SBA 504 programs. The SBA requires all partners with 20%+ ownership to provide personal guarantees. For limited partnerships, the general partner(s) must guarantee regardless of ownership percentage (since they have unlimited liability exposure anyway). The partnership agreement must confirm borrowing authority, and all required partners must sign the loan documents.
Further reading
This glossary entry is educational content. ClearValue Lending is a business & personal financing platform — not a lender, broker, or financial advisor. Specific product terms vary by lender; verify with the lender or issuer before applying. See privacy policy.
https://clearvaluelending.com/glossary/partnership-agreement