Is it Possible to Launch a Business with a Partner Without a Formal Partnership Agreement?
30 Oct 2023
Is it Possible to Launch a Business with a Partner Without a Formal Partnership Agreement?
When considering the launch of a small business, collaborating with a partner can significantly ease the process. Partnerships distribute the risks, share the workload, and often introduce fresh ideas to the venture. However, if you're contemplating forming a partnership for your enterprise, you might be wondering whether a formal partnership agreement is a necessity. Here's what you need to understand:
Partnership Agreements Are Typically Not Mandatory
When establishing a partnership, a formal written contract is usually not obligatory. Partnership relationships can be formed through either an express agreement or an implied one. In cases where the existence of a partnership is questioned, the courts will consider several factors, including your intentions, the sharing of profits and losses in a business bank account, and the financial contributions made by each partner to the business.
As there is no legal requirement for a partnership agreement, the process of commencing work together and launching your business is often straightforward. Typically, it involves selecting a company name, registering it with your state, obtaining an Employer Identification Number (EIN) from the IRS, and securing any necessary business licenses mandated by your state.
Should You Consider Creating a Partnership Agreement Anyway?
Even though a partnership agreement is not obligatory to start your business, it is advisable to create one, irrespective of whether you are starting a business with a spouse, another family member, or a close friend.
Running a business entails making countless decisions over many years. You'll need clarity on how responsibilities are shared, how profits and losses are distributed, the course of action if a partner passes away, dispute resolution mechanisms, and more. Additionally, partners may wish to limit their personal liability, safeguarding their personal assets in case the business faces difficulties.
The absence of a partnership agreement increases the risk of misunderstandings and conflicts. Without a clear plan for conflict resolution, determining an appropriate outcome can be challenging, whether you or a third party, such as a court, are involved. Severe issues may arise if a partner wishes to depart from the business or, tragically, passes away.
In essence, the success of your business and your financial security depend on your partnership. Taking this chance without a thorough discussion and a written contract is not advisable. Crafting a partnership agreement is crucial for establishing a shared understanding and ensuring that going into business together is a sound decision.
Therefore, if you are contemplating a joint business venture, prioritize the creation of a partnership agreement. Although not obligatory, its importance cannot be understated.