Friends or family members often decide to start a company together. These relationships usually begin with all partners highly dedicated and motivated to work together to create a successful venture.

Despite those shared goals and vision, it’s vital to the business as well as each partner’s well-being to spell out in writing how they will deal with issues or disputes that almost always occur down the road.

What is a partnership agreement?

This type of legal arrangement spells out the terms and conditions between partners and addresses structural issues that affect all parties, such as:

  • Ownership percentages
  • Distribution of profits and losses
  • Length of the partnership
  • Methods by which the partnership can be terminated
  • Ways each partner can buy or sell their share of the company

A formal agreement is crucial for a successful business model

Without a partnership agreement in place, a judge will likely decide what happens to the business when a dispute, death or divorce occurs. However, all parties can find relief by spelling out what happens when:

  • Partner roles and responsibilities are defined, including the managing partner
  • Spelling out the business’s tax status to avoid potential IRS issues
  • Determining each partner’s legal liability related to the business
  • What happens when a partner leaves, dies, becomes incapacitated or gets divorced
  • Setting conditions for taking on new partners
  • Setting terms for conflict of interest issues and non-compete agreements
  • Determining how disputes will be handled, such as through arbitration

Beware of DIY agreements

Many partners avoid getting legal advice at the beginning of forming a company because they want to avoid extra costs. However, putting a do-it-yourself agreement in place can be much more costly later on if the language is unclear or the contract is incomplete. An experienced business law attorney understands the laws and other key elements necessary for creating a plan that treats everyone fairly.