Get it in writing!
It comes up with surprising regularity - long term business arrangements are agreed to with no writing whatsoever. The law allows this - a general partnership can be formed without any official filings or written agreements and no one forces an individual owner to put anything in writing - but it can cause major problems down the road.
Recent contacts with unwritten business arrangements emphasize this point.
Case # 1: In one new business venture, an entreprenuer shook his head at the idea of needing to spell out details that had to the point "Just been worked out" between two friends who recently started a business together. This illuminates a reason why otherwise intelligent businesspersons fail to put things in writing. There is sometimes fear that putting details down on paper will destroy trust. However, if partners trust each other, that relationship will not be destroyed by committing to common goals on paper! Two other businesses at the other end of the spectrum (winding down rather than starting up) illustrate why a written agreement is so important, even if no conflcit ever arises.
Case # 2: A sole owner of a LLC wanted to finally retire and gradually transfer the business to long-term employees. No operating agreement existed - probably perceived as unnecessary for a single-member LLC. However, such an agreement was essential to sharing the business and needed to be in place before there could be joint decision making, funding requests, transfer of ownership interest and the like. Thus what seemed unnecessary at the beginning of the business became essential at retirement. Fortunately, this owner could put things in order - not everyone has that chance.
Case # 3: Another family came to me after a loved one who co-owned a business died. No details had ever been put in writing, title didn't necessarily match presumed ownership and the business was run "by a handshake" In some respects this worked - the partnership flourished for years and no one cared how things were titled, what the business was worth - earnings were split and that was that. However, when it came time to settle the estate, figure out what assets belonged to the partnership, what should go to the surviving partner and what should be kept with the estate to go to the family - it created havoc. A simple partnership agreement could have easily avoided these problems. The default rules help somewhat, but they are no match for a written partnership agreement.
On a related note, a general partnership simply does not insulate from liability. The family above could easily have been stuck with serious partnership debts. Other forms of ownership - such as a corporation or LLC - protect personal assets. However, no matter which form you select to run your business, a small amount of effort to create written rules (partnership agreement, operating agreement or by-laws) will pay off in the long run.
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