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Why your business needs a partnership agreement

Oct 26, 2022 | Business Law |

It can sometimes be tempting not to draft a partnership agreement. It seems like an extra step. You already know the person that you’re going to be starting the business with, and you trust them. You may be concerned that creating an official agreement will be seen as insulting.

But the truth is that all businesses run by multiple people should have some sort of partnership agreement in place. This is not insulting in any way. It is not an extra step. It is a necessary step that you should take to protect yourself, your company and your investment.

What goes in the agreement?

The specifics of a partnership agreement are going to differ with every circumstance, of course, but there are a few common things that will be addressed.

For example, dispute resolution may be important. If a disagreement happens in the future, how do you resolve it? What steps do you need to take? What happens if the two of you can’t find a resolution on your own? These are all important questions to ask, and it could be difficult to determine what to do in the heat of the moment. Putting it in the partnership agreement ensures that you already have that structure in place.

The partnership agreement can also prevent some disputes simply by giving you more definition of exactly where you stand. It could tell you what your role is with the company, what job title you have, what you expect from the other person and what ownership percentage you get for doing that job. The agreement can also talk about what to do with company profits, reinvesting money in the business or drawing your own salary.

Essentially, financial issues are a large cause of disputes for business owners, but a partnership agreement can sort out some of these details in advance. This helps the business be more profitable and lowers the odds of a serious dispute.

Setting it up

If you’re starting a business, you need to know about all of the legal steps to take, how to set up your company and the legal agreements that go with it.