When I started my business, I had myself and three other partners. Less than six months later, it is just me and one other partner. Without our Shareholders Agreement, we would have been in a real mess right now. I worked almost three straight months developing the agreement by myself (I'm not a lawyer). I finally had a lawyer review it at the end and he was shocked how detailed I had gotten. He made a couple minor changes, but I saved myself tons of money in lawyer's fees.

As far as a standard clause for "death of a partner" goes, it may vary state to state, but I think the estate of the partner (usually his family) gets his shares (or value of the company). Of course, the executor of his estate can claim that your company is worth more and might turn the screws, if you know what I mean.

The way our shareholder agreement works, since we are a start-up (low value), the company has two options concerning death depending on if the corporation has taken out life-insurance policies on the major shareholders. If there is a policy, the share's are forfeited at $0.00 a share, but the estate gets the full value of insurance policy (healthy sum of money: equal or greater than the shareholders value). If there is not a policy, the share's are required to be sold to the other shareholders or back to the company at a fair market price. This is to make sure control of the company is maintained, but also for the family to be properly compensated for their loss.

I would recommend protecting yourself with either a corporation status or an LLC. You need some protection. This guy maybe your bestfriend in the world, but money does strange things to people. Layout the rules ahead of time to avoid future battles.