You and a friend decide to start a business together. Your friend suggests that it can be fairly informal. After all, the two of you know each other well and are on good terms, so you could just start working together without any legal framework in place.
While this can work, you should be cautious. It is often better to have a partnership agreement in place. This provides certain legal protections and helps the business operate more efficiently. Also, it is not uncommon that things go wrong in business, so having an effective and well-drafted partnership agreement can help prevent misunderstandings and/or further resolves disputes if they do arise. What are some of the things that your partnership agreement can address?
Investments, earnings, and losses
To start, you may want to outline the financial details of the business. How much will each of you invest in the company? How will you divide the company’s earnings? Will you be paid hourly, take a salary or simply split the overall profits between you?
A partnership agreement can help avoid disputes by clearly defining these terms. Also, partnerships are not always equal. One partner may provide services to the company, while another partner may provide mostly capital infusions. Or, partners may contribute different amounts. If one partner contributes $50,000.00 and the other contributes $450,000.00, do you really want profits and losses being split equally?
The partnership agreement can clearly lay out how profits and losses are to be split based on these negotiated contributions and expectations for each individual partner going forward.
Without a partnership agreement, the partners will be left to default Florida law and, unless everything is straight down the middle 50/50 and equal, this may not fit the needs of the partners.
Ownership percentages
The agreement can also specify each partner’s ownership percentage in the business. Even if you’re planning a 50-50 split, it’s important to have this in writing. Ownership shares play a significant role when selling the business, bringing on additional partners, or making critical decisions about the company’s future.
Also, disagreements happen, whether you want them to or not. If one partner owns a greater percentage equity than another, but this is not in writing, you are leaving the company at risk by not having a clear managerial path forward. it is imperative to put ownership percentages in writing to ensure transparency, to determine who has the final say in decision making, and to try and resolve formal disputes before they balloon in to something worse.
Exit strategies
Additionally, your partnership agreement can address what happens if one of you decides to leave the business. Will you need to give notice to the other partner? Will the remaining partner have to buy out the departing partner’s ownership share? Establishing clear exit strategies ensures that transitions are smooth and amicable.
Without a properly drafted partnership agreement stating the rights and obligations of the partners to exit the partnership, you are leaving the business and your partnership at risk. For example, without clearly identifying these procedures, a partner may be free to sell their interest to an outside investor or third-party. Now, one partner is stuck in a partnership with someone they don’t know and with whom they have no prior business dealings. This could pose a threat to the business, as a whole.
These are just a few examples of areas a partnership agreement can cover. Contact Corey Szalai Law, PLLC to day to discuss how a customized and in-depth partnership agreement can help protect you and the business going forward.
A little investment on the front end to make sure everything is legal and well-documented can save the stress (and exorbitant legal fees) that may arise with a dispute in the future and can help protect something that you have spent blood, sweat, and tears to build. Be sure to take the necessary legal steps to protect your interests and set your business up for success.