Many business ideas begin informally. Whether it is a few friends in the garage or someone who becomes a mentor along the way, you might not start your company with a written agreement.
Creating a formal partnership may seem unnecessary, especially when you have a close relationship. Still, it is essential to plan for what can happen as you build your business. Without a written agreement, it can be challenging to determine the role and relationship you each have within the company if there is a dispute.
Here’s why you should have a written agreement between you and your business partner.
A way out
One of the essential elements of your formalized partnership is creating a way to end the partnership. While some partners are in business together for generations, it is critical to have a plan if your partnership does not work out.
A formal agreement gives you a plan for changing or dissolving the partnership. If you wait until one or both partners are upset about the arrangement, you may have to deal with emotions or other challenging circumstances as you make a new agreement.
A plan for your business
Formalizing your partnership includes more than just handling dissolving your partnership. As your business grows and changes, you and your partner will likely adapt along with it.
Your partnership agreement should include the roles you will play as your company develops and how you will evolve with changing responsibilities. While you may initially make a majority of decisions together, you should have an explicit agreement on who is ultimately responsible for business decisions, especially those with a significant financial impact.
Your partnership can also cover liability for actions of the business, including measures you, as partners, take on behalf of the company. In some cases, when you do not address the business’s liability, it can fall on the partners personally.
Your partnership agreement can help you and your partner understand your roles and how to resolve disputes as you develop your business together.