When two business partners decide to start a company together, one of the first steps they should take is to create a partnership agreement. A lot of people start partnerships with a handshake deal, but that can be very risky and may increase the odds of disputes in the future. A partnership agreement can officially establish their business relationship and address many important areas: Roles and responsibilities, dividing up earnings, investing in the business, dispute resolution tactics, etc.
One of the most important things that the partnership agreement should do is to talk about the ownership percentages. Hypothetically, if there are just two business partners working together, they may both assume that they would own 50% of the business. But even if this is true, it should be officially noted in the partnership agreement and not merely assumed.
Why is this so important?
First of all, the ownership percentage is important if business partners have to put anything to a vote. If they both own 50% of the company, then their votes carry equal weight and they need to agree or come to a consensus before making major decisions. But if one person owns 51% or more of the company, then they may have the ability to outvote the other partner.
The second reason to consider the ownership percentage is just to understand what the company’s value is to each person. Say that the partners decide to sell their company in 10 years. The ownership percentage helps them know how to divide the earnings from the sale. As noted above, it may also be important if the partners have to vote about whether or not they want to sell the business in the first place.
Drafting a partnership agreement is an important part of starting a new company, so make sure you know what legal steps to take.