Starting a partnership without an agreement
There can be an agreement between business partners even if nothing has ever been signed. If either partner went to court and asked that the agreement be enforced, the judge would probably rule that each party has an equal voice in running the business and that profits and losses should be shared equally.
But that may not be the ruling the partners are looking for. And there may be many other parts of the business relationship that are important which have never been discussed. Therefore, it is important to have a written agreement, such as a contract, with your business partner.
The kind of contract depends on whether the business is a Partnership, a Corporation or a Limited Liability Company (LLC).
What is included in a partnership agreement?
A partnership agreement can be any length. It can be as short or as long as the business partners need. Here are some of the subjects usually included in such an agreement:
- How much money is each party investing to get the business started?
- What will they do if additional money is required?
- What responsibilities does each party have?
- How much time will each spend working in the business?
- How are routine day-to-day decisions made? Is there a different procedure for major decisions like opening a new location, discontinuing a product, borrowing money, bringing in a new partner, or shutting down the business?
- How are profits and losses to be divided between the parties? Will they be split equally?
- What happens if one partner dies or withdraws from the business?
You should ask a lawyer to prepare a draft Partnership Agreement that you and your partner can discuss, modify and sign. If you and your partner cannot afford a lawyer, at least get a blank form from an office supply store or online, and modify it to fit your particular situation.
What is included in a shareholders agreement?
A Shareholders Agreement is like a Partnership Agreement, but it is used if the business is a corporation and the partners own shares of stock in the corporation. Partners who own stock in the corporation are called shareholders.
In addition to the items normally included in a Partnership Agreement, the Shareholders Agreement should provide what happens to the shares owned by each party in the event the party dies or retires from the business, is divorced from his or her spouse (who might then have some legal rights to the shares) or wishes to sell or give away the shares.
If stock certificates have been issued, they should bear a statement like, “These shares are subject to a Shareholders Agreement dated December 15, 2009,” so that the shareholder’s heirs and prospective purchasers are aware of what arrangements have been made with the shares.
A lawyer can prepare a more or less standard form of Shareholders Agreement for the parties to review and change. Take care of this early, as it might be more difficult to reach an agreement with your partner as the business grows and problems begin to arise.
Creating an LLC operating agreement
If the business is a Limited Liability Company (LLC), the owners are called members and the contract between them is called an LLC Operating Agreement. It is similar in many respects to a Partnership Agreement or Shareholders Agreement, but more complicated because of certain tax provisions.
Ask a lawyer to prepare a draft LLC Operating Agreement with blank spaces that you and your business partner can fill in and sign with the lawyer’s help.
Do we have to file our agreement with the government?
The agreement that you have with your business partner is a private document. There is no need to file it with the State of Illinois, the IRS or any other government agency or office. As a result, it will remain confidential between you and your partner unless one of you decides to show it to a third party.
Do I need a written contract if my business partner is a family member?
The answer to this question depends on the family relationship, how close you are to each other, and how likely it is that you and your partner may have different views about how the business should be run.
As a general rule, if your partner is your brother, sister, cousin, aunt or an uncle, you can probably suggest that it would be good to have a written contract without putting too much of a strain on the family relationship.
If the partners are a parent and child or a husband and wife, you will have to weigh the advantages and disadvantages of asking for a written contract. Experience has shown that real differences of opinion can arise even in these situations, but you may do more harm than good by trying to negotiate an agreement with your parent or your spouse.
One way to approach the matter, if you are concerned about your partner’s reaction, is to suggest that company policies be written down on paper. If your partner is willing to do so, and if no serious disagreements arise during the process, you might then suggest that each party sign the paper to show what has been agreed upon. In effect, that is a contract.
If the company is to be operated as an LLC, a written Operating Agreement is required by Illinois law, and you should not be reluctant to ask for it no matter whom your partner may be.