When you are starting out a business, you should keep in mind how you’ll run it. Naturally, you’ll want major control if it’s your business, but if you decide to partner up with someone, that’s when things can get tricky.
There’s nothing inherently wrong with having a business partner, though. Having two minds working to solve problems and get the business off the ground is great. There’s a lot of benefit in having an additional person around.
The trouble lies more in ownership, decisions, duties, and at the end of the day, profit. If these aren’t outlined in a legal partnership agreement, then you will run into major problems in the future.
Take a look at these reasons why it’s important to have a formal business partnership agreement with your business partner.
Ownership
Ownership is one of the absolute first things you need to get squared away. If you don’t settle on who owns the business and what stake they have, you’re bound to face significant legal troubles.
Ownership can vary in how it’s divided. If you were the one to come up with the idea and start the legwork for your business, you might want more stake in the business than your partner. However, this can be more complex than you imagine.
For example, you might have been the founder, but your partner could be the one who is funding the business more. They could also be the one who is taking your business to the next step. They would have a valid argument as to why they deserve a greater stake in ownership.
It’s best to hash out these details as soon as you can. Work on finding common ground and be reasonable with each other.
Duties and major decisions
In addition to ownership, you should outline job titles, responsibilities, and who gets to make final decisions.
Job titles play a big role in how a business operates. Sure, you might be co-owners, but maybe one of you is the CEO, and the other is the CTO, CMO, or vice president of sales. The titles don’t necessarily carry equal weight or responsibilities.
As you can imagine, if you’re the CEO, you would make the final decisions regarding most business matters. However, if your partner objects to something, but their job title is vice president of sales, then you might find yourself in an awkward situation.
It’s best to sort of who is in charge of what in the beginning. You’ll generally want to assign roles based on skillset, but you’ll still need to factor ownership. For instance, while your partner might be vice president of sales, they could have a right to sit in on critical business meetings outside of their department and be a part of major decisions.
Profits and losses
Right next to ownership, the big thing to sort of is profits, debt, and losses.
Profit is generally sorted out based on business ownership. The more of the business you own, the more profit you can gain. This would be a significant factor should you decide to sell your business at some point.
Debt is another thing to consider when you make a partnership agreement. The last thing you want is to be saddled with all the debt for your business, so you should outline formal terms on who has to pay what with your partner.
In the same realm, you need to outline how to handle business losses. If your business doesn’t perform well or has to close, you need to decide how the financial burden is divided.
Running a business with a partner comes with many benefits but does have some risks. Some of the most significant risks lie in not legally defining ownership of the business, so take precautions and create a legal document to address these matters.
