Creating a Partnership Agreement for UK Co-founders

A partnership agreement sets out how UK co-founders will run their business together, including decision-making, financial arrangements and what happens if someone wants to leave. Without one, the default rules under the Partnership Act 1890 apply, which often fail to reflect what founders actually intend.

This guide explains the key clauses to include, how to approach profit sharing and exit terms, and the steps for converting the partnership into a limited company later. It is written for early-stage founders and e-commerce sellers who want a clear, practical framework before significant revenue arrives.

Why a Written Partnership Agreement Matters

Many co-founders begin with a handshake and shared enthusiasm. Verbal understandings work until money, workload or differing visions create tension. A written agreement records what everyone expects and reduces the risk of costly disputes later.

Under the default rules that apply without an agreement, partners share profits and losses equally, have equal management rights and can dissolve the partnership with notice. These rules rarely match the commercial reality of an e-commerce or startup venture where one founder may contribute more capital, another more time, or where roles differ significantly. Drafting an agreement early forces founders to discuss these points while relations are good.

Key Clauses to Include

A basic partnership agreement should cover at least the following areas:

• Names and roles – full names of partners, the partnership name, and a description of each person’s day-to-day responsibilities.
• Capital contributions – what each founder is putting in (cash, equipment, intellectual property, or sweat equity) and how that will be recorded.
• Decision making – which decisions require unanimous consent (for example, taking on debt, admitting new partners, changing the business focus) and which can be made by majority or by designated partners.
• Intellectual property – confirmation that any code, designs, brand names or product ideas created for the business belong to the partnership, not to individuals.
• Confidentiality and non-compete – basic restrictions on using partnership information outside the business and preventing partners from setting up directly competing e-commerce stores during the partnership.
• Duration and termination – whether the partnership continues until dissolved by notice or a specific event.

Use plain language. Keep the document short enough that all founders will actually read it. Many early-stage teams start with a three- to five-page agreement and expand it as the business grows.

Profit Sharing and Financial Arrangements

Decide how profits and losses will be divided. Equal sharing is simplest but may not be fair if one founder is full-time while another keeps a day job, or if capital contributions differ greatly. Some partnerships allocate a fixed monthly draw to cover living costs, then split remaining profits according to an agreed ratio.

Document how expenses will be reimbursed, how often accounts will be prepared, and who is responsible for bookkeeping and VAT registration. Agree what happens if the business needs additional cash – whether partners must contribute equally or in line with their profit share. Because tax rules, thresholds and allowances change, always check the latest guidance on GOV.UK and with HMRC before finalising financial clauses.

For e-commerce sellers, it is useful to specify how revenue from different sales channels (Amazon, Shopify store, wholesale) is treated and whether any founder receives a commission on specific product lines they source or manage.

Exit Terms and What Happens When Someone Leaves

Exit provisions are often the most important and least discussed part of the agreement. Define a clear process for a partner to leave voluntarily, to be bought out, or to be removed for breach of the agreement or prolonged absence.

Common mechanisms include:

1. A valuation method – for example, net asset value, a multiple of average profits over the last 12–24 months, or agreement of an independent accountant.
2. Payment terms – whether the departing partner is paid in one lump sum or in instalments over six to 24 months.
3. Restrictive covenants – preventing the exiting founder from contacting customers or suppliers for an agreed period.
4. Continuation rights – the remaining partners can usually continue the business without the departing partner.

Without clear exit terms, a partner can simply give notice and demand an immediate division of assets, which can force the sale of stock or domain names at the wrong time. Agreeing these rules early protects both the individual and the ongoing business.

Converting the Partnership to a Limited Company

Most successful UK startups eventually incorporate as a private limited company. The partnership agreement should anticipate this step and set out how the transition will happen.

Key points to cover include:

• Trigger events for incorporation (for example, once annual revenue exceeds a certain level or when external investment is sought).
• How partnership assets (stock, domain names, customer lists, contracts) transfer to the new limited company.
• How each partner’s capital account and profit share converts into shareholdings in the limited company.
• Who will act as the first directors and company secretary (if required).
• That all partners must sign the necessary documents to transfer the business.

Incorporation changes liability from unlimited to limited, introduces new filing obligations at Companies House, and alters how profits are taxed. Rules and requirements change, so review the current process on GOV.UK and Companies House before acting. Many founders also take this opportunity to introduce a shareholders’ agreement that builds on the original partnership agreement.

Practical Steps to Create and Maintain the Agreement

1. Set aside dedicated time with all co-founders to discuss each topic above. Write down what you agree.

2. Use a plain-English template as a starting point, then adapt it to your specific situation. Avoid copying internet examples without understanding every clause.

3. Ask a solicitor to review the final draft. While this involves cost, it is usually far cheaper than litigation later. Some early-stage incubators can introduce founders to affordable legal support.

4. Sign the document, keep signed copies, and review it every 12 months or after any major change (new product launch, significant revenue increase, or shift in working arrangements).

5. Store the agreement with your other important business records. If you later incorporate, the partnership agreement can be referenced in the new company’s incorporation documents.

Common Pitfalls to Avoid

Leaving profit shares or exit terms vague is the most frequent mistake. So is assuming “we will sort it out later.” Another error is failing to address what happens if one founder becomes ill or wants to work part-time while the other continues full-time.

For e-commerce teams, also consider who owns supplier relationships and whether social media accounts used for the business are partnership property. Discuss these points explicitly and record the outcome in the agreement.

Finally, do not treat the document as set in stone. As the business evolves, amend the agreement with the consent of all partners and record the changes in writing.

Frequently asked questions

Related reading: What Should Be in Your Freelance or Contractor Agreement?, Supplier Contract Checklist for E-commerce Businesses, Legal Requirements for Your UK Refund and Returns Policy. Browse all company admin & legal guides or apply to Loomworks.