Partnership Agreement: From Trust to Legal Force. Exclusive article for the Ukrainian Bar Association

A successful partnership is always a combination of enthusiasm and discipline. It usually begins with a sincere handshake or a simple phrase such as ‘let’s work together’. Such trust uplifts, inspires and fosters a sense of teamwork. However, the reality of business demands more: simple words are often not enough to stand the test of time and money.

Real-life examples show that verbal agreements, where partners start a venture based on words alone, without any documents, almost always end in conflict. One co-founder spends time and resources, whilst the other, at a critical moment, may simply ‘take’ the clients or the technology, leaving their partner with nothing. Then even the strongest friendship turns into bitter disappointment. That is precisely why entrepreneurs advise that even ‘napkin’ notes or messages in a chat app are better than empty promises, as they at least serve to record intentions in some way.

A partnership agreement is a document that formalises the relationship between business partners. It clearly defines the objectives of the joint venture, the rights and obligations of each party, the procedure for sharing profits and losses, and the mechanisms for resolving disputes. Such agreements protect the interests of the parties and facilitate the resolution of disputes. They have the legal force of an ordinary civil law contract: if they are properly signed and do not contravene the law or the company’s articles of association, their provisions are binding and can be enforced in court.

How to draw up a partnership agreement

A partnership agreement can be drawn up in two ways: either by incorporating the necessary provisions into the company’s articles of association, or by concluding it as a separate agreement between the partners.

In the case of a limited liability company (LLC), the main rules of cooperation – shareholders’ stakes, voting procedures, and governing bodies – are usually set out in the articles of association. However, the articles of association are a public document, and amending them requires formal procedures. It is therefore advisable to set out additional arrangements in a partnership agreement, which is private in nature and not disclosed to third parties.

For a partnership agreement to function effectively, it is important, first and foremost, to establish a clear corporate structure. For example, register a limited liability company (LLC) with its own articles of association and transfer key assets (trademarks, equipment, intellectual property) to the company rather than to individual partners. This allows you to reliably protect business assets and clearly delineate liabilities.

The partnership agreement is concluded after the company has been registered, but it is advisable to do so right at the outset – even when the business is still in its infancy. After all, setting out key agreements in writing immediately establishes transparent ground rules and helps to avoid misunderstandings in the future.

A partnership agreement without a company: is it valid?

Sometimes partners reach an agreement even before a legal entity has been established. For example, at the idea stage or when the ‘business is still on a napkin’. In such cases, a partnership agreement or a joint venture agreement may be drawn up.

Such a document has the force of a civil law contract: it sets out the parties’ contributions, the distribution of profits, and their duties and liabilities. However, it is important to understand that it does not create corporate rights; in other words, it does not confer a share in the company (as the company itself does not yet exist). If one of the parties breaches the agreement, the other may take the matter to court — but the court will hear the case under civil law, not company law.

Jurisdiction depends on who the parties to the agreement are. If the parties are individuals, the case will be heard by a civil court; if they are business owners or legal entities, then by a commercial court. Furthermore, the parties may agree to arbitration.

When it is advisable to set out agreements in writing

Verbal agreements in business are always risky: without a written document, there are no guarantees that the terms will be honoured. It is particularly risky to leave matters relating to money or property unwritten. If an agreement is not set out in writing, in the event of a dispute it becomes nothing more than a memory, which each party interprets in their own way.

Putting a partnership agreement in writing allows you to immediately set out the size of shares, the deadlines and the procedure for contributing funds or assets. This helps to avoid misunderstandings in the future – particularly if one of the partners fails to fulfil their obligations or wishes to withdraw from the business.

Key provisions of a partnership agreement

A standard partnership agreement consists of a number of key sections:

• Parties to the agreement – full details of the partners.
• Purpose of the collaboration – a clear description of the business objectives and areas of activity.
• Contributions of the parties – the financial, tangible or intangible resources of each partner.
• Distribution of profits and losses – the proportions or mechanisms for sharing income and expenses.
• Partners’ rights and obligations – the tasks and responsibilities of each partner (e.g. management, finance, marketing).
• Management and voting – the decision-making process. For equal shares (50/50), special rules should be put in place to prevent the business from being blocked.
• Admission and withdrawal of partners – the conditions for new members joining and existing ones leaving: sale of shares, the procedure for valuing the business, buy-outs and settlements.
• Dispute resolution – the sequence of actions in the event of conflicts: negotiation, mediation, arbitration or court proceedings.
• Confidentiality – an obligation not to disclose trade secrets or the terms of the agreement.
• KPIs and reports – where necessary, partners may set out performance indicators and regular reporting requirements.

Such provisions make the partnership agreement a ‘living’ instrument: it not only formally enshrines the arrangements but also establishes clear rules of the game, whilst maintaining flexibility for the future development of the business.

Partnership Agreement versus Articles of Association

The main difference lies in flexibility and transparency. Articles of association set out the minimum necessary rules for all parties and are available for public inspection, whereas a partnership agreement establishes additional arrangements between specific individuals. The articles of association are strictly regulated by law, whilst a partnership agreement is based on the principles of freedom of contract and confidentiality. In it, the parties may set out the terms for withdrawal, voting or profit distribution more flexibly than in the articles of association, whilst remaining within the bounds of the law.

International case law: how different countries interpret partnership relationships

Partnerships without statutory rights

Sometimes the following situation arises: a company is registered in the name of a single person, but in reality the business is run by several partners. They agree to ‘share the profits’ and even sign a partnership agreement amongst themselves. But what happens when a conflict arises between them?

From a legal point of view, the register remains decisive: whoever is listed as the owner in the articles of association and in the state register has the full right to manage the company. A partnership agreement between ‘invisible’ co-owners does not alter this fact. It may serve as evidence of agreements in court — for example, to claim payment of an agreed share of profits or compensation for losses — but it does not grant the second or third partner any official corporate rights.

In other words, such an agreement functions as a civil contract between individuals, but not as a means of influencing the company itself. Therefore, if the partnership is truly long-term, it is worth ensuring that shareholdings are formally registered and amendments are made to the articles of association. Otherwise, even the best-drafted agreement will only provide protection in relation to ‘money between the parties’, but not in relation to the business as a legal entity.

A partnership agreement prior to company registration

Businesses often start out ‘on the back of a napkin’ — with agreements between future co-founders long before there is a memorandum and articles of association or an entry in the register. Is such an agreement valid if the company does not yet exist?

Yes, but only as a civil agreement between individuals. It sets out contributions, shareholdings and the rules of cooperation, and in the event of a dispute, it can be upheld in court. However, genuine corporate rights (shareholding, voting rights, participation in management) only arise once the company has been registered. If these arrangements are not subsequently incorporated into the articles of association or a corporate agreement, they remain ‘outside the system’ – formally binding between individuals, but not within the legal entity itself.

Therefore, the correct approach is as follows: if you have signed a partnership agreement prior to registration, include a provision stating that, once the company is established, all terms and conditions will be transferred to the articles of association and corporate documents. Otherwise, the risk remains: in business, agreements without formal backing quickly lose their force.

When a contract is stronger than the law: a lesson from the Congel v. Malfitano case

The case of Congel v. Malfitano (New York Court of Appeals, 2018) clearly demonstrates that a partnership agreement is not a mere formality, but a genuine ‘law’ for the parties. The partners owned a shopping centre and had entered into a written partnership agreement in which they clearly set out the conditions under which the business could be dissolved: for example, by a majority decision or upon the occurrence of a specific event. However, one of the partners decided to withdraw from the partnership in circumvention of the agreement, relying on the ‘default’ provisions of New York State law, which allow a partnership to be dissolved ‘at the will of a partner’ if the agreement is silent on the matter.

The court ruled in favour of the agreement. It emphasised that the law applies only where the parties have not themselves agreed otherwise. If, however, a written agreement sets out the procedure for withdrawal or dissolution, it is the agreement itself that determines the outcome, not the general provisions of the law. Consequently, the court ruled that the partner’s actions were unlawful and upheld the validity of the written document over the ‘implied’ provisions of the law.

This case sends a strong signal to entrepreneurs: a partnership agreement in the US has real legal force, capable of overriding even the general provisions of the law. In other words, the partners’ agreement takes precedence over ‘automatic’ rules, and it is this agreement that determines the fate of the business.

Cantor Fitzgerald v. Former Partners (Delaware Supreme Court, 2023): freedom of contract above all

In 2023, the Delaware Supreme Court heard the case of Cantor Fitzgerald, L.P. v. Ainslie, which became a landmark case in US partnership law. Cantor Fitzgerald withheld payments to former partners who, after leaving the business, had joined competitors — in accordance with the terms of the partnership agreement.

The former partners challenged these provisions as an unfair restriction on the right to work, but the Supreme Court ruled in favour of the company. The judges emphasised that agreements between sophisticated parties must be honoured if they were entered into voluntarily and without any indication of fraud.

This ruling established the principle that freedom of contract prevails, even if the agreement imposes certain restrictions. Cantor Fitzgerald was entitled to act in accordance with the signed terms, rather than on the basis of ‘moral’ considerations.

This case demonstrated that a partnership agreement has full legal force — even when it restricts competition. What matters to the court is not emotions, but the fact that the parties knowingly agreed to the terms of the arrangement.

Offshore Exploration v. De Jong Capital (NY, 2024): a partnership without a signature is not a partnership

In 2024, the New York Court of Appeals heard the case of Offshore Exploration & Prod., LLC v. De Jong Capital, LLC, in which the parties disputed whether they had formed a partnership to purchase an oil business.

The court ruled that drafts and verbal agreements do not constitute a partnership if the parties expressly stipulated that it would only come into being upon the signing of the final agreement.

Although the court allowed the fraud claims to proceed, it confirmed that a partnership agreement is only valid once it has been signed by all parties.

Consequently, in business, ‘verbal’ agreements do not create a partnership — legal effect only arises once the final document has been signed.

Handler v. Centerview Partners (Delaware, 2024): an oral agreement does not constitute a partnership

A similar position was recently confirmed by the Delaware Court of Chancery in the case of Handler v. Centerview Partners Holdings L.P. (2024).
This case was a logical continuation of a trend in US case law, where courts are increasingly distinguishing genuine partnership relationships from ordinary business agreements.

The claimant, former banker David Handler, argued that an ‘oral partnership’ with a right to a share of profits had in fact existed between him and Centerview Partners. However, after examining draft agreements, K-1 tax forms, W-2 reports and other documents, the court found that the absence of a signed contract and official partner status indicated that no legal partnership had been formed.

The judgement emphasised that an oral agreement can only be legally binding if it covers all material terms — contributions, shares, management arrangements, profit distribution, and so on. In the absence of this, even long-term joint activity does not give rise to partnership rights.

Thus, Handler v. Centerview has once again confirmed a key principle: in company law, the document takes precedence over intent. A partnership cannot be ‘proved by conduct’ — only a written agreement gives rise to real legal consequences.

Read the full article on the Ukrainian Bar Association’s website: here.