Starting A Business With A Partner? Learn This Term: “Pre-Formation Agreements”

April 11, 2014  |  

The National Action Network National Convention (taking place through tomorrow in Midtown Manhattan) is offering up tons of panel discussions on everything from the state of healthcare in this country to media and the social narrative. We sat in on part of a panel titled “Economic Development: Back to Basics — Finding Your Financial Freedom” and after lots of stats were presented — the average black American makes $34,000 per year while the average white American makes $52,000; only 10 percent of black dollars go to black businesses — we heard a term that we thought would be useful for all the entrepreneurs out there.

Delisha Grant, an attorney and small business expert, jumped right in with actionable info and her best suggestion: If you’re going into business with a friend or other business partner, get yourself a pre-formation agreement.

“Make sure your contracts are set so you know who owns what, what happens if someone leaves, [so on and so forth],” she said. In other words, have a prenuptial agreement for your business partnership.

According to Entrepreneur, which also offers a sample contract, a pre-formation agreement lays out both the “financial and organizational structure” of the company. As you can see from the sample, it doesn’t need to be an elaborate, pages-long document, but rather a thorough outline of what’s going into the business, who’s doing what, and how the money and structure breaks down. Here’s another sample and more information here, which goes into more detail on a state-by-state basis.

This is important enough to consult a lawyer, which is the route that we would suggest. Even if you aren’t starting an LLC or using some of the legal-ese that’s involved in these document samples, having something that all parties have signed that clearly lays out the terms of the partnership will save a lot of trouble and perhaps a few friendships in the end.

“Lawyers, we make most of our money on mistakes,” Grant pointed out from the stage. That got a knowing chuckle out of everyone in the audience. Consider yourself warned.

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