When one person decides to start a business by themselves, the business formation process may be fairly streamlined. They get to make all of their own decisions and create the business exactly the way they desire.
But when two partners are going into business together, there are some additional steps that need to be taken. It is very important to officially define their working relationship, and it is often wise to use contractual documentation like a business partnership agreement. Below are three different areas this agreement can address, although every situation is unique.
Division of income
To start with, the partnership should clearly define how the partners are going to divide income, along with any related debt. How much money are they each going to contribute to the business? Do they take a set salary, an hourly wage or just a percentage of revenue? This needs to be defined in advance to avoid future disputes.
Ownership percentages
Along with dividing income, the partners need to divide their ownership in the business itself. This could be as simple as saying that two partners each own 50% of the company. But it is still important to clearly define that in the agreement, especially when it comes to making key business decisions or selling an ownership share in the future.
Roles and responsibilities
Finally, the partnership agreement may define specific roles for each partner. Who makes creative decisions? Who makes financial decisions? Who makes key choices about the workforce or bringing on new employees? Many partnership disputes happen because the partners have overlapping roles, or assume they do, so defining them in advance can help.
The key is to be careful and proactive at the beginning of the business formation process, taking the correct steps to address any issues upfront. As business partners work their way through this process, they need to know what legal options they have.
