Do I need a partnership agreement to go into business with my friend?

Dear M & M:

I am thinking about going into business with my longtime friend. People are telling me I need a partnership agreement. What do you think?

-Bill

Dear Bill:

I must start out saying we are not attorneys and this is one area I would definitely advise you and your friend to seek out an attorney’s advice. According to the SBA, “A partnership is a single business where two or more people share ownership.” Generally each partner contributes to various parts of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

When forming a partnership agreement it enables all parties to think about and have discussions so everyone understands some very important parts of a business. Common things included in a partnership agreement include; What method will be used to resolve disputes, what is each partners share in the financial investment in the business,  what happens if one party fails to meet their obligation, can partners assign their shares to a third party, what happens if one partners wants out, what expenses must be approved by all partners, what happens if one partner is injured and can no longer take an active role in the business, how is income or losses distributed among all parties, who is going to do what, how much time will each partner spend in the business, who puts up more money if it is needed.

One can see partnerships usually involve more than one person in the decision making process. Everyone can see the importance upfront to develop a written document or agreement to decide how future business decisions will be made. Although partnership agreements are not legally required, it is highly recommended and it is considered very risky to operate without one.

Keeping in mind a person usually takes on a partner to fill a gap in expertise or knowledge or to bring more capital or investment opportunities into the business.  Generally there are three types of partnerships; general partnerships, limited partnerships and joint ventures. In a general partnership liability, profits and management is usually divided equally. If for some reason there is an unequal distribution, the percentages applied to each partner must be documented to avoid any misunderstandings down the road.

In the second form of a partnership know as a limited partnership the limits of each partner are dependent on that partner’s investment. Limited partnerships are used to attract investors for short periods of time. The third type of a partnership called a joint venture is usually for a single project and is usually for as limited time. A friendship founded on business is a good deal better than a business founded on friendship. – John D. Rockefeller.

In conclusion, to create a solid foundation get it in writing and get a qualified attorney involved.

-M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation (EDF) at 520-458-6948 or email  hollism@svedf.org .

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