If you are thinking of starting a small business, finding a partner could make getting off the ground easier. A partner could share the risk and share the workload, as well as bring new ideas to the table.
If you decide to form a partnership for your company, you may be wondering if you need a formal partnership agreement to do so. Here’s what you need to know.
Partnership agreements usually are not required
When you form a partnership, you usually do not need to create a formal written contract. Partnership relations can be created when you come to either an express agreement or an implied agreement.
And if there’s a question about whether a relationship existed, courts will look at many things to decide including what you intended to do, whether you shared profits and losses in a business bank account, and how much money you each contributed to the business.
Since no partnership agreement is required by law, there’s often very little you actually need to do to start working together and get your business off the ground. Usually, it’s a simple matter of selecting a company name, registering it with your state, getting your Employer Identification Number (EIN) from the IRS, and obtaining any business licenses your state may require for you to operate.
Should you make a partnership agreement anyway?
While you are not required to make a partnership agreement to get your company off the ground, you should anyway. This is true even if you are starting a business with a spouse, another relative, or a very close friend or loved one.
See, running a business means making a million decisions over many years. You’ll need to know how responsibility will be shared, how profits and losses will be distributed, what happens to the partnership if someone dies, how disputes are resolved, and more. One or more partners may also want to limit their personal liability, which means taking steps to ensure their personal assets are not at direct risk if something goes wrong with the company.
If you do not have a partnership agreement in place, you may not be on the same page about these issues and the chances of a conflict arising are far higher. There also won’t be a clear plan in place for how that conflict should be resolved, which will make it difficult for you or a third-party (like a court) to determine an appropriate outcome. Serious problems could also happen if someone wants to leave the business or passes away.
The bottom line is, you’re betting the future success of your business — and your livelihood — on your relationship with your business partner. There’s no way you should do that without sitting down and hammering out the details of what that will look like and putting them into a written contract. This process alone can go a long way toward helping you confirm you’re on the same page and going into business together is indeed a good idea.
So, if you’re thinking of starting a company with another person, make creating your partnership agreement a top priority. Just because it’s not required doesn’t mean it’s not important.
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