If you’re starting a business with another business partner, the two of you may informally agree to work together. Maybe you are coworkers who are starting a side business. You don’t take the time to establish any legal paperwork and the business just grows organically.
But having a verbal contract, a handshake deal, or just a basic understanding of how the business will operate may not be enough. Let’s look at why there are a few issues with doing this, and why it may be better to draft an official partnership agreement.
Disputes are more likely
For one thing, not having an official document means that it is more likely you and your partner will get into disputes in the future. A partnership agreement can help to define things for you, such as how you should use the business’s revenue or who gets to make certain creative decisions. Without an agreement in place in advance, these are common areas where partners will disagree.
It’s difficult to prove
Another issue with a handshake deal is that it can be hard to prove who said what at the time, especially if it was years in the past. Imagine that the two of you go to sell your business and you say that you had 50-50 ownership. But your partner counters that they thought it was 60-40 ownership in their favor. They claim that’s what you agreed to initially. Both of you seem to believe what you’re saying, so how do you prove who is correct?
In short, having things written down and signed in official documents makes your business more stable and helps you resolve disputes. Be sure you know what steps to take.