Partnership Agreement Red Flags: Six Clauses to Check Before You Sign
This page is general information, not legal advice.
A partnership agreement sets out who puts in money, who makes decisions, how profits are split and what happens when someone wants out. People often sign it when everyone gets along, so the hard parts get skimmed. Those are the clauses that matter most when a partner leaves, falls ill or stops agreeing with you. This page covers six clauses that often move risk onto one partner. For each one you get an illustrative example, why it matters, and wording you can propose. Partnership terms can usually be negotiated before signing. The rules on partner duties, liability and exits vary a lot by jurisdiction and by the type of business you set up.
The example clauses below are illustrative. They are not taken from any real company's agreement.
1. Capital calls with a dilution penalty
A typical clause might read: "The Managing Partner may require additional capital contributions at any time. Any Partner who fails to contribute within ten (10) days shall have their ownership percentage reduced accordingly."
Why it works against you
One partner can decide the business needs more cash, and you have days to find it or lose part of your stake. A partner with deeper pockets can use this to squeeze others out. There is often no cap on the amount, no vote and no option to lend the money instead.
What to ask for instead
Sample wording to propose: "Additional capital contributions require the unanimous written consent of the Partners. A Partner who does not contribute may instead have the amount treated as a loan from the contributing Partners, and no ownership percentage changes without that Partner's written consent."
2. Control in one partner's hands, with no way to break a deadlock
A typical clause might read: "The Managing Partner shall have full and exclusive authority over all business decisions. In the event of disagreement among the Partners, the decision of the Managing Partner shall be final."
Why it works against you
You may share ownership but have no say over hiring, borrowing, big purchases or selling assets. In a partnership split evenly two ways, an agreement with no deadlock process can leave the business stuck, and the only way out may be a lawsuit or shutting down.
What to ask for instead
Sample wording to propose: "Major Decisions, including borrowing, selling material assets, admitting new partners and changing the business, require unanimous consent. If the Partners cannot agree, they will first attempt mediation before any other remedy."
3. A buyout price set by the other side
A typical clause might read: "Upon a Partner's withdrawal, death or disability, the remaining Partners may purchase that Partner's interest at a price determined by the remaining Partners, payable over five (5) years without interest."
Why it works against you
The people buying your share decide what it is worth, and they pay slowly with no interest. "Book value" formulas can also ignore goodwill, customer lists and growth. A related right of first refusal can block you from selling to an outsider at a fair price. See right of first refusal clauses explained.
What to ask for instead
Sample wording to propose: "The purchase price will be fair market value as determined by an independent appraiser chosen jointly by the Partners. Any installment balance will bear reasonable interest and be secured, and will be paid in full if the business is sold."
4. Expulsion without cause
A typical clause might read: "A Partner may be expelled at any time by a majority vote of the other Partners, with or without cause, and shall forfeit any unpaid distributions."
Why it works against you
The other partners can vote you out of a business you helped build, keep your share of profits already earned, and then apply a low buyout formula. Without a defined cause, a notice period or a chance to fix a problem, there's little to stop it being used as a tactic.
What to ask for instead
Sample wording to propose: "A Partner may be expelled only for Cause, as defined in this Agreement, after written notice and a reasonable opportunity to cure. An expelled Partner keeps all distributions earned before expulsion and is bought out at fair market value."
5. A broad non-compete after you leave
A typical clause might read: "For three (3) years after ceasing to be a Partner, for any reason, a Partner shall not engage in any business similar to the Partnership's anywhere in the country."
Why it works against you
If you are forced out or bought out at a low price, a broad non-compete can still keep you out of your own trade. Restrictions on contacting clients or staff can have the same effect. Whether these are enforceable varies a lot by jurisdiction. See non-compete clauses explained.
What to ask for instead
Sample wording to propose: "Any post-exit restriction is limited to soliciting the Partnership's active clients for a reasonable period, applies only to the Partnership's actual service area, and does not apply if the Partner was expelled without Cause."
6. Personal liability and one-way indemnities
A typical clause might read: "Each Partner shall be jointly and severally liable for all obligations of the Partnership and shall personally guarantee any Partnership debt upon request of the Managing Partner."
Why it works against you
In some partnership structures, each partner can be on the hook for the whole debt, not just their share. A duty to sign personal guarantees on demand puts your savings or home behind decisions you may not have approved. Watch for indemnities that protect the managing partner but not you. See indemnification clauses explained and limitation of liability clauses explained.
What to ask for instead
Sample wording to propose: "No Partner is required to give a personal guarantee without their written consent. As between the Partners, each bears losses in proportion to their ownership, and a Partner who acts outside their authority indemnifies the others."
Also worth a look
Check whether disputes go to private arbitration (see mandatory arbitration clauses explained) or to a far-away court (see governing law and jurisdiction clauses explained). Also look at who owns brand names, software and client lists you bring in (see IP assignment clauses explained), how and when profits are actually paid out, and what happens to your share if you die or become unable to work.
Scan your own agreement free
Every partnership is different, and one vague word can decide who walks away with the business. Upload your partnership agreement to ScanMyTerms as a PDF, DOCX, TXT or MD file, or photograph it. In about a minute you get a list of the clauses that work against you, with a risk level, the exact wording, why it hurts and how to change it. The free preview needs no sign-up and shows the risk count and the first two findings. The full report is $5. ScanMyTerms does not use your documents to train AI models, and reports are deleted after 7 days.
This page is general information, not legal advice. Partnership rules vary by jurisdiction, so for decisions about a specific agreement, talk to a qualified business lawyer where you live.
Sources
- All clause examples on this page are illustrative and written for this guide. They are not quoted from any real company's agreement.
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