My Partner Can Do What? Why You Need a Written Partnership Agreement

So . . . you’ve been talking to someone else about the possibility of going into business together. Great! Two heads are often better than one – you get twice as many ideas, money, and hands to do the work. But before you trot down to the county to file your DBA statement, kick in money or assets, or, really, do anything to get the business going – write up a partnership agreement.

Yes, sit down with your prospective partner, agree on some basic operating parameters, and write them down. Do this now, while everyone’s happy and enthusiastic and on the same page. You might not need a lawyer for this – just write down what you’ve agreed on, sign it, and put it in a safe place.

The reason is simple – you don’t need a written piece of paper to form a partnership, in law. Folks were shaking hands and making deals long before computers, typewriters, or even widespread literacy. In law, a partnership is simply an association of two or more people to carry on a business for profit.

There’s no requirement that each partner kick in money, let alone equal shares. But unless the partners agree otherwise, any profits are shared equally, not in proportion to partners’ contributions. And any losses are shared in the same proportion as the profits. Partners all have equal management rights. One partner can be personally liable for another partner’s actions on behalf of the business. Partners can freely sell or give their partnership interests to others. Adding a new partner requires the unanimous consent of the existing partners.

What I’ve just described are the default rules, at least in Texas. (Other states may have different defaults.) You don’t have to use them – as long as you agree on what you’re using instead. And the best proof of your agreement is that you wrote it down and everyone signed it.

Why not use the defaults? They might not work for what you want to do.

Say one partner will put up most of the money but stay out of the day-to-day work, and the other will put up very little money but work every day. If they don’t agree otherwise, profits will be split 50-50. Is that actually what they want?

Say one partner wants to put the business name on her car, then use it in the business. Does the business, and the other partner, now have some rights to the car? Potentially, yes.

Say the partners have a disagreement on strategy.Can one partner obligate the business to spend money, even if the other partner disagrees? Without an agreement otherwise, yes.

Can one partner hire someone without the other partner’s consent? Again, without an agreement otherwise, yes.
What if one partner wants out, but he’s the expert, and the other partner doesn’t want to let him out. Can the other partner prevent him from selling his share to a complete stranger? Not without an agreement that says this isn’t allowed.

So think about these scenarios. What’s appropriate for your particular situation? A lawyer can suggest more possibilities, and guide you through appropriate options for you. Even without a lawyer, though, work this out now, while everyone is excited about the new business and eager to get going – and Write. It. Down.

Want more guidance? Need help deciding what’s right for you? We can help – contact us today.