Avoid the "Handshake Agreement"
Proper documentation is crucial for multi-owner businesses to ensure protection and clarity for all parties involved. Written agreements are always best!
When more than one person owns a business, verbal “handshake” agreements may feel convenient, but they expose everyone to serious risks. With any type of business entity having more than one owner, the proper written documentation is essential. Some entrepreneurs are reluctant to take this step as it may be seen as a lack of trust. On the contrary, written agreements demonstrate good business and are designed to protect all parties involved.
Formalizing the arrangement in writing is essential to safeguarding the business and preventing future conflicts. Written documentation, such as partnership agreements, operating agreements, and shareholder agreements, clearly outline the roles, responsibilities, and expectations of each owner. This helps prevent misunderstandings and conflicts by providing a reference point for decision-making and dispute resolution.
Related Post: Why you Should Get it in Writing
Memory lapses: Over time, owners may forget what was agreed upon or interpret terms differently.
Unbalanced expectations: Without a clear document, disputes may arise over ownership stakes, responsibilities, or profit-sharing.
No dispute-resolution mechanism: Even friendly separations can become messy when there’s no process for handling departures, dissolutions, or disagreements.
A properly drafted business contract or agreement can provide clarity and peace of mind. Key provisions you should never skip:
Ownership structure & roles: Define who owns what percentage and each person’s responsibilities.
Profit & loss splits: Establish how revenue, expenses, and distributions are allocated.
Decision-making authority: What decisions require unanimous consent? What can one partner make on their own?
Exit & succession planning: Clarify how an owner can be bought out, transferred, or replaced.
Dispute resolution clauses: Include mediation or buy-sell terms as a backstop.
| Informal Approach (“Handshake”) | Written Agreement |
|---|---|
| Memory-dependent, often forgotten | Clear, enforceable terms |
| Expectations open to interpretation | Defined roles, profit shares, and exit procedures |
| No formal mechanisms for disputes | Pre-established plans for resolution and ownership changes |
Your business is too valuable to rely solely on trust. Well-drafted written agreements:
Protect your interests,
Manage transitions,
And minimize legal risk if relationships sour.
If you’re forming a partnership, operating as an LLC, or selling business interests, let our attorneys help you:
Establish the right business entity;
Draft effective agreements tailored to your goals;
Plan for future challenges like growth, ownership changes, or exit strategies.
Business owners usually split with one another eventually. Sometimes it is a friendly split, but sometimes it is not. When the business relationship is not in writing, each owner has a different opinion concerning who owns which business assets and how the business should be divided.
Having the agreement in writing reduces potential conflict. Properly written agreements can address important issues like profit distribution, ownership percentages, and procedures for adding or removing owners. By establishing these guidelines upfront, business owners can focus on growing their enterprise with confidence, knowing that their interests are safeguarded.
Your business is important to you. Let us help you protect your business by advising and helping you set up your company, preparing contracts that help protect your interests, or preparing for the sale or transition of your business. Please call our office at (888) 887-4170 if you have any questions about this article.
Proper documentation is crucial for multi-owner businesses to ensure protection and clarity for all parties involved. Written agreements are always best!
