Informal Partnership Agreement

by Fraser Sherman; Updated September 26, 2017

Partnerships are more than just two, three or several people working together. A partnership is legal arrangement: it can be complex, as in a limited liability partnership; it may be a written general-partnership agreement; or you can simply agree to work together and share the profits without writing anything down. If you decide to forgo a formal partnership agreement, your working arrangement will be governed partly by your state's laws.

Creation

The first thing to consider is whether what you have is really a legal partnership. You can find this out by checking your state's laws. In North Carolina, for example, a partnership automatically exists when two or more people co-own a business for profit and haven't created some other business structure. Receiving a share of the profits is proof of partnership, except when the money is paid out to settle a debt, pay an employee, pay the rent or similar purposes.

Contributions and Rewards

One thing partners have to agree on is what each of them will bring to the table: Your contribution, for example, could be cash or a vehicle; another partner might provide sales expertise, or contribute added cash. Equally important is how the profits will be divided up -- equally, or in proportion to your contributions, for example. State law may dictate some of your procedures; if the law doesn't suit your needs, you'll have to draft a formal agreement.

Decisions

You can't run a business without making decisions, but partners may not agree on what the right decision is. You and your partners should have a clear understanding how you will resolve disputes: for example, by reaching unanimous agreement; by majority vote; or by allowing individual partners to make some decisions on their own. State law will control some of your arrangements, the Nolo legal website states. For example, unless you have a written agreement saying otherwise, the law lets any partner commit the business to a debt or a contract, even if the rest of you oppose it.

Endings

Sooner or later one of you may decide to leave the partnership, or become too ill to participate, or die; if you want your business to endure, you need to agree on what happens next. This is another area where a written agreement -- guaranteeing that if one partner leaves, the others can buy out her share, say -- may give you more certainty than an informal arrangement. Without an agreement, state laws may dictate what happens to the partnership when one partner leaves or dies.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.