Maybe the person that you want to start a business with is your college roommate, and you have been friends for three decades. Perhaps you have industry connections that helped you, an enthusiastic investor, connect with an entrepreneur who has a truly cutting-edge concept but lacks the funds to make it a reality.
Regardless of the prior relationship with your potential business partner and the kind of company you want to run, your partnership should not be an informal or verbal agreement. You have too much at risk when starting a company to gamble everything on maintaining a positive relationship and sharing the same values. You can protect yourself by creating a partnership agreement.
Why do partnerships require contracts?
You and your partner will have shared responsibilities for the business you create together and also shared risk if the company fails. You need to understand your individual obligations and your expectations for the company.
How much money does your partner expect you to invest? How will you share the revenue when the company starts generating profit? Is there a point at which you would agree to sell the company to another business?
These are all issues that you should carefully clarify in a partnership agreement. That way, you start this important relationship in total agreement about what you expect from each other and what you hope for from the company you plan to build together.
A partnership agreement protects you if things go wrong
Ideally, your new business would thrive and encounter no real challenges. However, businesses often struggle before succeeding or fail despite careful planning and significant investments.
When you have an agreement in place with your partner, you can have a clear exit strategy when the business starts the struggle. You can also potentially use that agreement to resolve conflicts with your partner. Before you start investing money or formally create the business entity, you may need to have a sit-down discussion with your partner-to-be about your future business together.
Drafting a partnership agreement is one way to protect yourself as someone hoping to start a new business.