Critical Terms to Include in a Partnership Agreement to Prevent Disputes
July 22, 2025
Starting a business partnership is an exciting venture. Whether you’re joining forces with a friend, family member, or professional colleague, a partnership offers the potential to combine talents, share responsibilities, and grow something meaningful together. But it also carries risks.
Too often, businesses fail, not due to market conditions or bad ideas, but because the partners never took the time to spell out the terms of their relationship clearly and in writing. Even strong partnerships can fall apart under the weight of misunderstandings, financial stress, or changing life circumstances.
At McCarter | East PLLC in Murfreesboro, Tennessee, we believe the best time to prevent a business dispute is before it begins. That means creating a comprehensive and legally enforceable partnership agreement that anticipates potential areas of conflict and lays out a clear road map for resolution.
We’ll walk you through the critical terms every Tennessee partnership agreement should include to minimize risk and keep operations smooth, even when disagreements arise.
Why You Need a Partnership Agreement
A partnership agreement is a legally binding contract between two or more individuals who agree to operate a business together. While the Tennessee Revised Uniform Partnership Act (TRUPA) provides default rules in the absence of a written agreement, relying on these one-size-fits-all provisions can lead to outcomes you didn’t intend—and don’t want.
A custom-drafted partnership agreement allows you to:
Define roles and responsibilities clearly
Allocate profits and losses as desired
Avoid or resolve disputes more easily
Prevent misunderstandings about money, authority, and ownership
Protect the business if a partner dies, leaves, or becomes incapacitated
Now let’s examine the essential elements you should include in your agreement.
Capital Contributions
Every partner should know what they’re expected to bring to the table. This includes initial contributions and any future capital requirements.
Key questions to address:
Who is contributing cash, property, equipment, or services?
How are contributions valued?
Will partners be required to make future capital infusions?
What happens if a partner fails to contribute?
By clarifying who contributes what and when, you avoid future resentment and claims of unequal investment.
Ownership Interests and Profit Sharing
Don’t assume that ownership is automatically equal just because two or more people are starting a business together. Your agreement should specify:
Each partner’s ownership percentage
How profits and losses will be allocated
Whether partners receive guaranteed payments (e.g., salaries or draws)
How and when distributions will be made
Without a written agreement, Tennessee law presumes that profits and losses are split equally, regardless of how much each person contributed or worked. That may not reflect the reality of your arrangement.
Decision-Making Authority and Voting Rights
Many disputes arise over who gets to make decisions and how those decisions are made. To reduce friction, you should define:
What decisions can be made individually vs. collectively
Whether votes are based on ownership percentage or equal per partner
What types of decisions require unanimous consent, such as:
Admitting a new partner
Selling business assets
Taking on debt
Amending the partnership agreement
Clearly outlining these rules can prevent gridlock and resentment.
Responsibilities of Each Party
While some partnerships operate as shared ventures with interchangeable duties, many succeed when partners have defined roles. Your agreement should include:
Each partner’s title and responsibilities
Expectations for working hours, effort, or availability
Any limitations on authority, such as spending thresholds or hiring/firing authority
This section is particularly important in partnerships where one person is more active in day-to-day operations than the other(s).
Dispute Resolution
No matter how solid your relationship is today, disagreements are inevitable. How you resolve them can determine whether your business survives.
Your agreement should establish a process for resolving disputes, which may include:
Informal negotiation
Mediation with a neutral third party
Binding arbitration instead of litigation
Majority or supermajority vote on key issues
You may also include a deadlock-breaking provision, such as a rotating “tie-breaker” vote or buy-sell option triggered by impasse.
Partner Withdrawal, Death, or Disability
Eventually, one or more partners will leave the business—voluntarily or involuntarily. Your agreement should address:
How a partner may voluntarily exit
What happens if a partner becomes incapacitated or dies
Whether remaining partners have a right of first refusal to buy the departing partner’s interest
How the buyout price is determined (e.g., fixed formula, third-party appraisal)
Whether the exiting partner can compete with the business
Failing to include these provisions can lead to expensive and disruptive battles—or worse, result in the unintended dissolution of the business.
Non-Compete and Confidentiality Clauses
To protect your business’s goodwill and sensitive information, consider including:
A non-compete clause restricting partners from starting or joining competing businesses during and after the partnership
A non-solicitation clause prohibiting partners from soliciting clients, vendors, or employees if they leave
A confidentiality clause protecting trade secrets, financials, or proprietary methods
These clauses must be reasonable in scope and duration to be enforceable under Tennessee law.
Admission of New Partners
Bringing in new blood can be exciting—but it also creates risk. To avoid future disputes, the agreement should specify:
How and when new partners may be admitted
Whether existing partners must unanimously approve
How new ownership interests are calculated
What contributions new partners are required to make
Whether new partners are entitled to management rights
Formalizing this process helps maintain stability and prevent power struggles.
Exit Strategy and Dissolution Procedures
Eventually, most partnerships will come to an end—whether due to retirement, sale, or other life changes. Your agreement should outline:
Under what conditions the partnership may or must be dissolved
How assets and liabilities will be divided
How outstanding debts will be handled
Who has authority to wind up business affairs
Whether any partner has the right to buy out others and continue the business
It’s also wise to include provisions that address valuation. How is the business interest of a departing partner calculated? Will you use book value, fair market value, or an agreed-upon formula? Will an independent CPA or appraiser be used? Setting these terms in advance prevents prolonged disputes and avoids the need for costly litigation when emotions are running high.
Moreover, if your business has intellectual property, trademarks, or proprietary systems, the agreement should clarify whether those assets remain with the company or with the partner who developed them. Without clear instructions, these assets may become sources of conflict or even stall dissolution proceedings.
Governing Law and Jurisdiction
Your agreement should state that it’s governed by the laws of the State of Tennessee and specify the venue for any legal proceedings. This may seem boilerplate, but it helps avoid jurisdictional fights if disputes escalate to court.
Ongoing Maintenance and Updates
Too many partnerships create an agreement once and never revisit it. As your business evolves, so should your partnership agreement.
Key triggers for review include:
Significant changes in business structure or operations
Admission or exit of a partner
New funding or investment rounds
Expansion into new markets or industries
We recommend reviewing your agreement annually and updating it as needed to reflect new realities. Even minor clarifications—such as updated roles or revenue-sharing arrangements—can make a major difference when conflicts arise.
It’s also worth considering creating a “partner handbook” or internal governance document that supplements the formal agreement with policies around day-to-day procedures, vacation policies, work-from-home expectations, and client intake processes. While not always legally binding, these documents can promote consistency and reduce friction.
Enforcing Your Partnership Agreement
Even with a strong agreement, enforcement matters. When disagreements arise, courts in Tennessee will look first to the terms of the written contract. That means your agreement must be clear, enforceable, and compliant with current state law.
A vague or poorly worded contract can hurt your case in litigation or arbitration. That’s why professional legal drafting is so critical. It not only prevents disputes but strengthens your legal position if a dispute ever does occur.
Contact a Business Law Attorney for Assistance
Creating a comprehensive and effective partnership agreement requires a solid understanding of Tennessee law. That’s where McCarter | East PLLC comes in.
Located just two or three blocks from the local courthouse, our firm helps business owners in Murfreesboro, Tennessee, and the surrounding areas understand their rights and avoid disputes. Contact us today to begin working with a knowledgeable and experienced Tennessee business law attorney.