FAQ 6. Does our “partnership” agreement have to be in writing?

First of all, general partnerships are a terrible way to do business that may expose your personal assets to business liabilities but may also expose you to your business partner’s liabilities as well. Despite the risks of general partnerships, having a partnership agreement in writing is usually only a legal requirement for partnerships engaging in certain activities, such as purchasing real estate. While this might seem like a friendly development to those who do not wish to spend a bunch of time and money hammering out the details of the relationship, please be assured–its actually a potentially serious problem.

That’s because the lack of formality around when a general partnership is formed means that terms between the partners may be forgotten or misremembered later on, which causes a lot of disputes. Furthermore, the very question of whether both parties intended to form such a partnership can be the subject of a dispute–both between the purported partners and between one of the alleged partners and the creditors of the other partner (remember that “first of all” above?).

Secondly, people throw a lot of terms around pretty loosely; among them, the word “partner” and “partnership.” While they actually may be referring to a kind of entity enjoying limited liability, advising third parties that their business is a partnership can cause unwelcome confusion in the mind of a third party doing business with a person they may assume is a principal of the business and may lead to complicated and expensive litigation to sort it out if there is ever a dispute.

Takeaways here should be:

–do your best to avoid “hand shake” partnerships, or in fact, any general partnerships unless form for a specific and, preferably, limited purpose with the help of legal counsel; and

–don’t refer to your business as a partnership unless that is an absolutely accurate description to avoid present confusion with real future consequences.

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