It is important to draft a partnership agreement when going into business with someone else. One of the common reasons for this document is that it helps define ownership shares. Many partnerships are split 50-50, but not always.
That said, why does the ownership percentage matter? You may have assumed that the two of you would be working together as co-owners, so you are not necessarily concerned about the technical split. Below are two reasons why it is important.
Making key decisions
First and foremost, when making business decisions, the majority owner often has the final say. If your business partner owns 60% of the company and you only own 40%, they typically do not have to ask your permission to make decisions. They may not have to take a vote. They can simply decide what they believe is best for the company on their own. You are a partner in the business and one of the main owners, but that does not mean that your position gives you as much power as your partner has.
Selling the business
The second reason why ownership shares are important is that you may one day want to sell the company. If you are splitting the profits, you are both likely entitled to the portion of the profits that corresponds with your ownership share. You do not want to make any assumptions about how much you will receive in the transaction without first considering the partnership agreement and how much of the business is yours.
Questions about finances and decision-making power are common among business partners. When disputes arise, they must know what legal options they have.
