When starting a business partnership, is it essential to have a partnership agreement? Let me illustrate the answer to this with an anecdote.

A friend of mine who lives outside of Florida decided to go into business with his neighbor a few years ago. The initial partnership was casual, to say the least. My friend—let’s call him Ted for privacy purposes. My friend, Ted, had the idea for the business. He had done the research on the market (it was basically untapped) and came up with the business plan. The problem was, he needed a place to set up shop and some initial funding. When Ted told his neighbor about his idea, the neighbor was quick to jump at the opportunity. He had a connection with someone who rented office space, and he had been looking for new investment opportunities.

When they formed their partnership, neither of them saw the need for a partnership agreement because they each had a clear idea of what their respective roles would be. The only problem was that their ideas couldn’t have been more different.

While Ted was looking for someone to share the responsibilities of running the business, his neighbor had thought he would simply have to provide the funding and workspace. Because neither of them was willing to budge on their stances, they were forced to close up shop.

The moral of this tale is clear. Whether you want to set up a general partnership, a limited partnership, or a limited liability partnership, it’s important to understand the risks associated with entering into business without a partnership agreement. While forming a business partnership without a drafted agreement isn’t illegal, there are too many variables that can have a negative impact on one or multiple parties, as we saw above.

Here’s what you should consider when drafting a partnership agreement:

Division of Labor

Because his neighbor didn’t think he was on the hook for any labor, Ted had to do all of the actual work. If you want your partnership to survive, including the details of who will do what for the business in your partnership agreement is an essential step that you can’t skip.

Financial Management

Businesses need to make money, so it’s only logical that someone needs to handle the financial side of things. Whether you decide to put one person in charge or want to split the many financial responsibilities that businesses have, you have to put it in writing and make sure that every party knows what is expected of them.

Resolving Disputes

Like anyone else, business partners have disagreements. To make sure that these disagreements are handled fairly, your partnership agreement needs to stipulate the process for resolving them. One common way that many partnerships choose to resolve disputes is to appoint a neutral third party to hear the argument and make a judgment. It’s also a good idea to lay out how a partner might leave the business, including how the buy-out process works.

These examples of what to include in your partnership agreement are just a few of the things that you need to consider to protect yourself and your business. If you’re thinking of starting a business and need help drafting a partnership agreement, call the partnership agreement experts at AM Law.