Do You and Your Business Partner Need a Contract?

If you want to start a company with a new business partner, you may be wondering if the two of you need to sign any official paperwork or a contract to work together.

Is a partnership agreement required, or can you just declare yourselves to be co-owners and move forward with a handshake deal?

You’re Not Obligated to Have a Partnership Agreement, but It Is Unwise to Skip It

If you’re considering no more than your obligations, then you do not need to have a contract or any other official agreement. It’s not legally required. Many businesses are owned by people with no formal relationship, who have just verbally agreed to work together.

That said, it is wise to have a partnership agreement, which is similar to a contract. This agreement can help to limit disputes by defining the terms of your relationship. For instance, perhaps you consider yourself the “main” owner, but your partner thinks it’s a 50/50 split. Is that going to lead to problems when deciding how much each of you will earn or who gets to make major decisions for your company?

The partnership agreement ensures that you and your partner both know exactly how your relationship will function — and that is an excellent way to minimize disputes down the line.

What if Your Business Partner Breaches Your Agreement?

Once you have it in place, neither of you can breach your partnership agreement. For instance, your partner cannot sell your half of the company to a third party. They cannot make decisions that you have been given the authority to make. They can’t use business assets for personal gain if doing so is made illegal in the agreement.

If your partner does breach the agreement, then you may need to know what legal steps you can take to assert your rights. Working with an experienced attorney can help you put the right agreements in place when you first form your business — and it’s essential to work with an advocate when there are problems.