Starting a relationship without an agreement

An agreement between business partners can exist even if nothing has been signed. If either partner went to court and asked that the contract be enforced, the judge may rule that each party has an equal voice and share in the business. So, the profits and losses should be equally shared.

But that may not be the ruling the partners are looking for. There may be many other parts of the business relationship that are important and have not been discussed. This is why it is important to have a written 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?

If the business is a partnership, a Partnership Agreement is used. A Partnership Agreement can be any length. It can be as short or as long as the business partners need. Some of the subjects usually included are:

• How much money is each party investing to get the business started?
• What will they do if additional money is required?
• What duties 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 will profits and losses be divided between the parties? Will they be split equally?
• How will disputes be resolved?
• What happens if one partner dies or withdraws from the business?

You should ask a lawyer to draft a Partnership Agreement that you and your partner can discuss, modify, and sign. If you and your partner cannot afford a lawyer, get a blank form from an office supply store or online, and modify it to fit your particular situation. Your business can use one lawyer but keep in mind that in that case the lawyer represents the business and not you or your partner individually.

If you do not have a written Partnership Agreement, the Uniform Partnership Act applies. 

What is included in a shareholders agreement?

If the business is a corporation, a Shareholders Agreement is used and owners are called "shareholders." A Shareholders Agreement is like a Partnership Agreement for corporations. In this Agreement, partners own shares of stock in the corporation. Partners who own stock in the corporation are called shareholders. When forming the corporation, you will make decisions about the share structure. Some of those decisions include:

• Classes of shares to be authorized or issued,
• Number of shares to be authorized or issued, and
• What type of voting rights shareholders have.

Classes of stock refers to the different rights or preferences the shareholder is entitled to.

A Shareholders Agreement includes similar items to a Partnership Agreement. It should also provide what happens to the shares owned by each party in various cases, including when a party dies or retires, divorces from their spouse, or wishes to sell or give away shares.

If stock certificates have been issued, they should bear a statement like, “These shares are subject to a Shareholders Agreement dated December 15, 2019.” This informs the shareholder’s heirs and prospective purchasers of the shares what arrangements have been made with respect to the shares.

A lawyer can prepare a standard form of Shareholders Agreement for the parties to review and change. Take care of this early. It is more difficult to reach agreements with your partner as the business grows and problems arise.

Creating an LLC operating agreement

If the business is an LLC, the owners are called members. The contract between them is an LLC Operating Agreement. 

Some of the subjects usually included are:

• Purpose,
• Membership provisions, such as management, voting, compensation, and meetings,
• Tax and financial provisions,
• Capital contributions by members,
• Membership withdrawal,
• Dispute resolution, and
• Dissolution.

It is best to have a written operating agreement. If you do not, the state's LLC Act will apply.

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. Find more information about starting a small business here.

Do I need a written contract if my business partner is a family member?

The answer to this question depends on the family relationship. It depends on how close you are to each other, and how different your views are on how the business should be run. It is always easier to enter into an agreement before any issues or problems arise.

You can 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 pros and cons of asking for a written contract. Real differences of opinion can arise even in these situations. However, you may do more harm than good by trying to negotiate an agreement with your parent or your spouse.

If you are concerned about your partner’s reaction, suggest that company policies be written down. If your partner is willing to do so and no serious conflicts arise, you might then suggest that each party sign the paper to show what has been agreed upon. In effect, that is a contract.