What happens if you don’t have a partnership agreement?
Blog by Attorney Michael Jonas and Summer Law Clerk Shiri Salehin
Today, in this blog post, we are going to tackle decision making in partnerships. Let’s say you decided to start a wedding photography company with your best friend and you’re both equal partners. You’ve agreed to split the business 50/50. The business has been going well and now you’re ready to expand.
Your business partner/best friend thinks you need to buy a better, quite expensive camera to get more clients, but you are confident that you can succeed with the camera you’ve been using. Ignoring your opinion, your partner goes ahead and uses the company card to order a new camera. How could they do that when you’re 50/50 partners and you didn’t want to buy a new camera? Don’t you need 100% agreement, aka both partners agree, to act as the company?
Unfortunately being 50/50 partners doesn’t mean what you think it does.
A 50/50 split actually refers to just one thing, how profits and losses are distributed. If you haven’t filed any paperwork with the state, you’re likely operating via default as a partnership—which has some important legal implications. The first is that unless you have a written agreement stating otherwise, you are both 100% able to act for the business. That’s because partners have the authority to engage in the ordinary conduct of the business.
In our fictitious scenario, buying a camera falls within the scope of conduct necessary for a wedding photography business. To make matters worse, you’re also both 100% independently responsible for the debts your partnership acquires. That means you’re on the hook for the new camera you didn’t want to buy. Now, you’re potentially unhappy with your business partner and may also be questioning your friendship.
The great news is that this hardship is entirely avoidable if you form both a formal business entity (ie. LLC or corporation) and negotiate and sign a partnership agreement.
Whether you are starting a new business with a partner or already have one, it’s not too late to get the legal help you need. Schedule a free 30 minute service consult with Rational Unicorn Legal Services today so that you have more certainty that you’ll be able to keep not just your business partnership, but your friendship intact. Rely on the legal experts to set up your partnership with a good legal foundation. We form entities of all types, from LLCs and DBAs to corporations, both nonprofit and for profit. Get started with us by visiting our contact page.