A Partnership can be advantageous when set up and executed properly. However, they can also be setup accidentally and this can be stressful and harmful to a new business.

I have seen this too many times in my career. Two people (we will call them partner A & Partner B) discuss an idea then partner A runs with it and starts making things happen (this could be years after the discussion). Partner B sort of just watches from the sidelines and does not believe the idea is going to work and really wants nothing to do with it. Partner A is chugging along getting everything into place and then really hits it big. Suddenly, Partner B wants in on the profits! The issue here is technically the two were partners in an idea regardless of what happened after that. Partnerships are the only entity that can be formed by a verbal agreement. Partner B can take Partner A to court for half of the business.

You must take into consideration what the Uniform Partnership Act defines as a partnership: “The association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.”

It is crucial you make sure you protect yourself. Be careful how you start your business if you are working with a relative or friend you make sure you have it in writing that you are not forming a partnership. Be careful who you borrow money from and make sure you have in writing that the borrowing of the money does not give them ownership in your business.

If you do intend to form a partnership make sure you seek a legal professional to draft the partnership agreement. A partnership agreement should outline how voting rights, Sharing of income and expenses are handled. It should also address the personal liability of the partners. In the absence of an official partnership agreement, all assets and debts are split equally.

The moral of the story be cautious and mindful as you dive into any business venture. Always seek a legal professional to make sure you have everything setup properly.

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