Does a General Partnership need a partnership agreement?

A general partnership is not legally required to draw up a partnership agreement, but in practice, it is highly recommended. A general partnership is formed as soon as two or more persons collaborate to generate profit and each contribute something to it, even without written agreements. Precisely because the law regulates little, a good partnership agreement prevents conflicts regarding profit distribution, contributions, liability, and the entry or exit of partners. Without a contract, only the general statutory rules apply, and these rarely align with your specific situation.

What exactly is a partnership?

A general partnership is a form of collaboration in which two or more persons, the partners, jointly practice a profession or business under a common name. Each partner contributes something: money, goods, labor, or knowledge. The general partnership is often chosen by liberal professions who wish to work together but remain independent.

Consider, for example, dentists, physiotherapists, lawyers, or architects who run a practice together. A general partnership is not a legal entity: legally, the partnership itself is not a separate entity like a private limited company (BV). In principle, the partners act for themselves and are personally involved in the obligations they enter into.

Partnership, general partnership, or private limited company: what is the difference?

The general partnership resembles the limited partnership (VOF), but there are differences in, among other things, the type of activity and the manner in which partners can be held liable. In broad outline:

• General partnership: traditionally for the practice of a liberal profession (e.g., dentist or lawyer); not a legal entity; the partners are personally involved in the obligations they enter into.
• General Partnership (VOF): generally for conducting a business; not a legal entity; the partners are in principle jointly and severally liable for the debts of the general partnership.
• Bv: is a legal entity; liability is in principle different, because the BV itself bears the obligations.

If you are unsure about the right legal form, seek advice before you start. We would be happy to explain the consequences of each choice to you.

Is a partnership agreement legally required?

No. No written contract or notarial deed is required to establish a general partnership. Just as with a sole proprietorship, the partnership essentially arises from the factual agreements between the partners. In most cases, however, you do register the general partnership in the Trade Register of the Chamber of Commerce.

However, “not mandatory” does not mean “not necessary”. Without a partnership agreement, the partners fall back on general statutory rules. These rules are formulated generally and do not take into account the specific agreements you wish to make together. This can lead to unpleasant surprises as soon as disagreements arise.

Why is a partnership agreement still highly recommended?

A partnership agreement sets out the mutual ground rules and prevents disputes afterwards. In the contract, you include agreements regarding matters that go wrong precisely when they are not documented. The most important topics are:

• Contribution: what does each partner contribute (money, labor, goodwill, equipment) and what is that worth?
• Profit and loss distribution: how are profits and any losses distributed among the partners?
• Decisions and powers: who may enter into which obligations, and from what amount is the consent of all partners required?
• Joining and leaving: what happens when a partner wants to leave, or when a new professional wants to join?
• Investments: how are larger expenditures, such as new equipment, financed and borne?
• Termination and disputes: how is the partnership dissolved and how do you resolve internal conflicts?

A good contract helps guarantee that partners remain partners, thereby safeguarding the continuity of the practice. That is fair to yourself, each other, and your clients.

What are the risks without a partnership agreement?

Anyone who starts without written agreements takes unnecessary risks. The most common problems:

• Conflict over profit distribution: without a deviating agreement, a dispute quickly arises regarding who is entitled to what, especially if the partners' contributions differ.
• Uncertainty upon withdrawal: if a partner leaves or someone passes away, it is often unclear what happens to their share and the ongoing practice.
• Liability: partners can be held personally liable for obligations entered into within the partnership. Clear agreements regarding powers limit that risk.
• Deadlocks: with two standards that are equal, a difference of opinion can paralyze the entire practice if there is no dispute resolution mechanism.

If things go wrong and nothing has been documented, a legal dispute is often more difficult and expensive to resolve. A well-thought-out contract beforehand is much cheaper than a conflict afterwards. Should a dispute nevertheless arise, our legal experts will assist you with legal support to resolve the matter as quickly and professionally as possible.

A lender may ask for a partnership agreement

If you need financing, a lender looks at income from previous years. For a start-up entrepreneur, this is more difficult because that history does not yet exist. In that case, additional arguments can help, for example, that you work together in a partnership and thereby bring in the experience and turnover of your partners.

A partnership agreement makes that collaboration and the mutual relationships demonstrable. This can provide a lender with additional security. In many cases, a clearly defined profit distribution is indispensable in this regard.

Partnership agreement and tax considerations

Not only practical and legal reasons argue in favor of a partnership agreement; your bookkeeper or accountant will often push for one as well. If, for example, a partnership is established between spouses, the way in which profits are distributed can have tax implications. Exactly how a distribution turns out depends on the personal situation, deductible expenses, and other income.

It is important that the agreed profit distribution is realistic and true to reality, and aligns with the actual contribution and work of each partner. A distribution that deviates significantly from this can raise questions during an audit by the Tax Authorities. Therefore, always have your tax situation reviewed by your accountant or tax advisor; the exact rules and amounts may change and depend on your circumstances.

Please note: the rules for partnerships are being modernized

The statutory framework for general partnerships, limited partnerships, and limited liability partnerships essentially dates back to the nineteenth century. The legislature has been working for some time on modernizing these personal partnerships. In the proposals discussed, the sharp distinction between general partnerships and limited partnerships is being eliminated, among other things: the existing forms would largely merge into a more limited number of types of personal partnerships. In this context, these partnerships may acquire legal personality under certain conditions, while the personal liability of the partners remains in principle.

Whether, when, and in what exact form these changes will take effect had not yet been determined at the time of writing. In this regard, a well-drafted partnership agreement remains valuable: it records your mutual agreements, independent of the precise legal background. If you would like to know what the announced changes could mean for your partnership, please seek specific advice; we will monitor developments for you.

How do you draft a good partnership agreement?

A partnership agreement is custom-made. A template from the internet rarely covers all situations that arise in your specific partnership and often lacks precisely the provisions that matter in the event of a conflict. When drafting, at a minimum consider:

1. Who are the mates and what does each bring to the table?
2. How do you allocate profit, loss, and costs?
3. Which decisions may a partner make alone, and which together?
4. What happens in the event of illness, death, joining, or leaving of a partner?
5. How do you handle disputes and the eventual termination of the partnership?

Have your contract drafted or reviewed by a lawyer familiar with your industry. This ensures that the agreements are legally sound and suit your situation.

Frequently asked questions about the partnership agreement

Is a partnership agreement mandatory?

No, a partnership agreement is not legally required. A partnership can be formed without a written contract. In practice, however, a contract is strongly recommended to prevent conflicts regarding profits, contributions, and liability.

Does a partnership agreement need to be drawn up by a notary?

A notarial deed is not required for a partnership agreement; a private written agreement between the partners suffices. However, it is advisable to have the contract drafted or reviewed by a lawyer to ensure that the agreements are legally sound.

What is stated in a partnership agreement?

A partnership agreement includes, among other things, the contribution of each partner, the distribution of profits and losses, powers, rules for entry and exit, agreements regarding investments, and provisions for disputes and dissolution.

What happens without a partnership agreement?

Without a partnership agreement, only the general statutory rules apply. These do not take your specific agreements into account, which can lead to greater ambiguity and conflict regarding, for example, profit distribution and the withdrawal of a partner.

What is the difference between a general partnership and a limited partnership?

A general partnership is traditionally used for the practice of a profession, while a limited partnership is typically used for running a business. There are also differences in the way partners can be held liable. Which form suits you best depends on your situation.

Can I use a free template for a partnership agreement?

A free template can provide a first impression, but it rarely covers your specific agreements regarding contributions, powers, withdrawal, and disputes. It is precisely these provisions that are decisive in the event of a conflict. Therefore, have a template reviewed by a lawyer at the very least, or draft a custom contract.

How much does it cost to have a partnership agreement drawn up?

The costs depend on the complexity of your partnership and the number of partners. A custom-drafted contract is typically a one-time investment that pales in comparison to the costs of a conflict afterwards. If you would like to know what a partnership agreement costs in your situation, please request a no-obligation quote via our page on the partnership agreement (MTS).

Does a partnership agreement also apply between spouses?

Yes. Even when spouses or partners enter into a partnership together, a partnership agreement is advisable. It sets out the contributions and profit distribution, which not only provides mutual clarity but can also be of tax importance. However, always have your situation reviewed by your accountant or tax advisor.

Have a partnership agreement drafted by MKB Juristen

Do you want to ensure that your partnership is properly documented? Our legal experts will draft a tailor-made partnership agreement for you and explain all practical, tax, and legal considerations. Are you unsure about the right legal form, or would you like advice on corporate law? You can turn to us for that as well.

Schedule a no-obligation telephone intake and learn about what a partnership agreement can mean for your business.