When you form a business with other people, the automatic default is that you are forming a general partnership. This is a very dangerous form of business, because you are personally liable for the debts and obligation of the business (even actions taken without your knowledge or approval).
So if you are not ready to form an LLC or corporation, you need to draft a written agreement ASAP.
Your written agreement should state the expectations for who will do what, who is liable for debts, how profits will be split, and generally the various assumptions each of you are making inside your heads … to get it all on paper now & avoid misunderstandings later.
Here’s the thing.
Many business partners already know each other (siblings, best friends, colleagues, spouses), and therefore think they don’t need formalities. They think they can rely upon their pre-existing relationship to smooth things over.
But that’s the very reason you need a written agreement—to preserve the relationship.
For some people, the fact that you have an established friendship may actually make it more difficult to communicate about sticky business situations. Written partnership agreements are to protect business relationships. Your written partnership agreement needs to address the following issues:
- Outline of responsibility for various roles.
- Profit allocation.
- Responsible party for taxes, losses, and debts.
- Ownership percentage allocated to each person.
- How much each person is contributing to the business.
- Who can make management decisions for the business.
- Voting rights.
- Protections for the minority owners.
- Plans for if the partners tie in voting, and there is an impasse.
- Termination, sale, buyout, and/or succession plans in case an owner wants out or a party faces sickness/disability/death.
There are many default rules that apply (based upon your country or state), but you can usually modify those default rules however you want, depending upon the particular law.
For example, if three people start a business together, they are by default a general partnership and are splitting profits equally.
However, they could instead decide to split the profits on a different profit share based upon each partner’s initial financial contribution, or have one partner receive an increasing profit share each year based upon future annual contributions of labor. You can set it up in many creative ways, as long as you get it in writing (but the more creative you are, the more likely you’ll need a lawyer to help you make it legal).
Want to chat about your specific partnership situation? Try a Quick Call with Elizabeth!