Partnership agreement: what belongs in it, and what happens without one
A partnership agreement is not a form. It decides who makes decisions, how profit is divided, and what happens on the day one side wants out. Without it, the default rules of the Partnerships Ordinance apply, and they are almost never what the parties intended. This page goes through the agreement clause by clause.
“While the partnership works, nobody opens the agreement. It is written for the other stage.”
Adv. Erez Sapir
Why the agreement is your first line of defence
Most partnerships open in a good atmosphere, and that is precisely why the agreement gets postponed. It feels unnecessary to regulate a dispute with someone you currently trust completely. The trouble is that a partnership agreement is not written for the good days. It is written for the moment the parties no longer agree, and by then it is too late to draft, because each side already knows which wording serves them.
A partnership is the only structure in which two people carry unlimited personal liability side by side. The Ordinance provides that every partner is liable, jointly with the others and severally, for all partnership obligations. A decision by one partner can reach the pocket of the other. The agreement is the instrument that defines in advance who may commit the partnership, up to what amount, and what happens when someone exceeds that authority.
One distinction decides cases: the agreement does not bind an outside creditor. Towards third parties liability remains joint and several. The agreement governs the relations between the partners, meaning who ultimately bears the burden and who is entitled to contribution.
Source: Partnerships Ordinance [New Version], 5735-1975. Checked September 2026.
What happens when there is no agreement
Without an agreement the partnership is not left without rules. The default provisions of the Partnerships Ordinance apply, written decades ago and unsuited to most businesses today. They do not know that one partner contributed capital and the other contributed time. They do not know that one brings the clients and the other brings the expertise. They divide by a uniform rule.
The familiar result is an argument about profit sharing. The partner who put in most of the capital finds they must share equally. The partner who worked full time finds that the partner who appeared once a week is entitled to the same share. Both are convinced they have been wronged, and both are reading the same Ordinance.
The second argument is about authority. Without an agreement it is unclear who may sign a binding contract, who decides on hiring or on taking credit, and what happens when opinions differ. That question is not theoretical. It surfaces the day the bank asks for a signature.
Source: Partnerships Ordinance [New Version], 5735-1975. Checked September 2026.
The core: what every partnership agreement must contain
Some elements are what make the document an agreement rather than a statement of intent.
The parties and the scope of the business. What exactly is the joint venture, and what stays outside it. A partner who continues to work in the same field independently needs that boundary in writing.
Holdings. What percentage each partner holds and on what basis. Percentages need not be equal, and need not match the profit split.
What each side contributes. Capital, equipment, assets, intellectual property, working time, clients. What is not recorded is forgotten.
Authority and management. Who runs the day to day, which decisions require unanimity, and the ceiling on commitments any partner may take alone.
Drawings and salary. Whether a partner receives a salary for work in addition to a profit share, and how much may be drawn.
Entry and exit. How a new partner joins, how an existing one leaves, and what happens on death or incapacity.
Dispute resolution. Mediation, arbitration or court, and in what order.
Money: capital, drawings and profit sharing
Three separate questions that tend to get mixed. The first is the initial contribution: how much each side put in, and whether it is a shareholder loan to be repaid or capital that is not. The difference decides the day of separation, so it belongs in writing.
The second is the profit split. It can follow holdings, it can follow actual contribution, or it can combine the two: pay for work, and a division of the remainder. A common and effective mechanism is to separate compensation for labour from return on capital, so the partner who works more does not feel exploited and the partner who invested more does not feel diluted.
The third is drawings policy. A business that is profitable on paper can run into a cash squeeze if two partners draw according to personal need. It is worth setting a drawing ceiling, fixed dates, and a minimum cash cushion that is not breached.
If the business accumulates debts it cannot pay, the discussion moves elsewhere. See liquidation of an insolvent entity and the personal guarantee, relevant to any partner who signed for the business.
Decision making and deadlock
In a fifty fifty partnership of two, every real disagreement is a tie. That is the built in flaw of the structure, and every serious agreement addresses it in advance.
Common solutions: giving one partner a casting vote on defined subjects, appointing an agreed third party such as the firm accountant to decide financial questions, referring the dispute to binding mediation before any other step, and finally an exit mechanism that triggers when nothing else resolves it.
Equally important is grading decisions. Not everything needs unanimity. Define a closed list of material decisions, such as taking credit above a set amount, selling an asset, changing the field of activity or admitting a partner, that require full agreement, and leave the rest to ordinary management.
Exit mechanisms
This is the part nobody wants to draft and everyone later finds was the most important. Three accepted mechanisms:
Buy me buy you, known as BMBY. One side names a price for a share, and the other chooses whether to sell at that price or buy at it. The structure forces the offeror to name a fair price, since they may find themselves on the buying side.
Right of first refusal. A partner who receives an outside offer must first offer the same terms to their partner. It guards against an unwanted party entering.
Tag along. A minority partner may join a sale by the majority partner on the same terms, so as not to be left alone facing a new buyer.
Alongside the mechanism itself, the agreement must set how value is determined, who the valuer is, the payment schedule, and what happens to personal guarantees given by the departing partner. A guarantee that was never released keeps following a person who already left the business, and it is one of the most frequent failures we see.
Confidentiality, non compete and intellectual property
A partner is exposed to the client list, the pricing, the suppliers and the working methods. Without regulation, nothing prevents them taking all of it and opening a competing business across the street.
A confidentiality clause should define what counts as confidential information, how long the duty lasts, and what happens to copies held by a departing partner. A non compete clause should be measured: a defined field, a reasonable period and a defined geography. An overly broad restriction risks not being enforced, which makes a focused restriction worth more than an ambitious one.
Intellectual property is the forgotten chapter. Who owns the logo, the code, the content and the client database. The default is not always the partnership, especially where the asset was created before formation or by an outside contractor. Ownership has to be assigned to the partnership in writing rather than assumed.
Seven recurring mistakes
Downloading a template. A template does not know who invested what or who does what. It creates a feeling of security with no substance.
Postponing until the business stabilises. The business stabilises, the liabilities accumulate, and the agreement gets written only after the first crisis.
No exit mechanism. The one component certain to be used if the partnership ever separates.
Confusing ownership with profit share. These are two separate decisions and they may be set differently.
Ignoring personal guarantees. Leaving the partnership does not automatically release a guarantee given to a bank.
Leaving intellectual property unassigned. The most valuable asset in the business sometimes stays in the private hands of one side.
Copying another business agreement. A structure that suits two technology founders does not suit two independent professionals.
How we work on a partnership agreement
We begin with a conversation that maps the picture: what each side brings, who actually does what, where the mutual dependence lies, and what each imagines will happen if they want out. Only then do we draft. In most cases that conversation surfaces gaps in expectation the parties did not know existed, and that is precisely its value.
Alongside the agreement we examine whether a partnership is the right structure at all, handle registration of the partnership with the Registrar, and make sure the agreement speaks to the bank documents and to guarantees already given.
To reach us: 02-5953322 in Jerusalem, 03-3030430 in Tel Aviv, WhatsApp 050-4411343.
Frequently asked questions about partnership agreements
Is a partnership agreement mandatory?
Does a partnership agreement protect me from creditors of the partnership?
What is a BMBY mechanism?
Can a partnership agreement be changed after signature?
What happens to the agreement when a third partner joins?
How long does it take to prepare a partnership agreement?
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Business support, incorporation and licensing · Partnerships and non-profits · Shareholders and corporate governance
Legal support for businessesChoosing a business structureSetting up a limited companyBusiness licensingRegistered and unregistered partnershipsPartnership agreementRegistering a non-profitCorporate governancePersonal liability of officersShareholder rights and dutiesMinority shareholder oppressionPiercing the corporate veilThe agency problemPoison pill provisionsContracts and transactions · Liquidation, insolvency and debt collection
Non-disclosure agreementAgency agreementFranchise agreementRaising capital with a SAFEDue diligence before a purchaseVoluntary liquidation of a companyExpedited voluntary liquidationLiquidating an insolvent companyClawing back gifts in insolvencyDebt collection and creditor representationPersonal guaranteesBefore you sign a partnership agreement
Send us a draft, or tell us what was agreed verbally. We will mark what is missing, what exposes you, and what to settle before signature.