Partners Should Put Their Business Agreement in Writing

Ann Logue in an article advises partners in a start-up business to put the terms and conditions of their business relationship in writing.  This should be done before your open the doors for your business.  The agreement should cover each party’s roles, responsibilities and obligations.  Changes in the business and in its ownership should also be clarified.  Such agreements made beforehand could also benefit the day-to-day operation of the business while avoiding unpleasant surprises.  Logue says the absence of incorporation documents can “lead to legal disputes that cost money, ruin reputations and destroy friendships”.  Bringing in third party investors to the business without a clear agreement between or among partners may strip the owners of control of the business.

One fundamental error made by many startups is failing to have essential business documents and agreements in place from the beginning. Partners often hold off on putting key terms in writing because in the early stages, when everyone is enthusiastic and in sync, they can be loath to interfere with the thrill of getting a new business off the ground. But having basic partnership or incorporation papers that outline each party’s roles and obligations, as well as other agreements more specific to the type of business, is key to preventing problems down the road.

In fact, companies that use lawyers and have documentation in place are more likely to succeed than those that don’t.

In addition to specifying founders’ roles, partnership and incorporation documents lay out a plan for what will happen if there are changes among company principals or if the business shuts down altogether. People can quit, relocate or die, so a buyout clause is a necessity; companies that fail can leave behind assets that will need to be sold or distributed among the owners. Talking about these transitions beforehand will save time, money and hurt feelings later.

Agreements should be negotiated as early as possible–ideally before opening the doors, but certainly before the business accumulates value and/or before it takes on debt.

When employees are certain of their responsibilities and the value of any ownership they may have, they are likely to put more into their jobs. Clear incorporation documents prevent unpleasant surprises, such as a smaller-than-expected share of sale proceeds, which can lead to legal disputes that cost money, ruin reputations and destroy friendships.

The partnership or incorporation agreements are also closely related to the financing of the business, so they should be drawn up before seeking outside capital. “If you are seeking financing and you haven’t tackled this, you’re going to have a problem,” Pakroo says. If one founder is providing a significant amount of the capital, it is particularly important to have a lawyer review the paperwork. …

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