Money Management

If you run a business as a partnership, the law may not require you to have a partnership agreement — but you should put one in place anyway. Here’s why. 

If you are thinking of starting a small business, finding a partner could make getting off the ground easier. A partner could share the risk and share the workload, as well as bring new ideas to the table.

If you decide to form a partnership for your company, you may be wondering if you need a formal partnership agreement to do so. Here’s what you need to know.

Partnership agreements usually are not required

When you form a partnership, you usually do not need to create a formal written contract. Partnership relations can be created when you come to either an express agreement or an implied agreement.

And if there’s a question about whether a relationship existed, courts will look at many things to decide including what you intended to do, whether you shared profits and losses in a business bank account, and how much money you each contributed to the business.

Since no partnership agreement is required by law, there’s often very little you actually need to do to start working together and get your business off the ground. Usually, it’s a simple matter of selecting a company name, registering it with your state, getting your Employer Identification Number (EIN) from the IRS, and obtaining any business licenses your state may require for you to operate.

Should you make a partnership agreement anyway?

While you are not required to make a partnership agreement to get your company off the ground, you should anyway. This is true even if you are starting a business with a spouse, another relative, or a very close friend or loved one.

See, running a business means making a million decisions over many years. You’ll need to know how responsibility will be shared, how profits and losses will be distributed, what happens to the partnership if someone dies, how disputes are resolved, and more. One or more partners may also want to limit their personal liability, which means taking steps to ensure their personal assets are not at direct risk if something goes wrong with the company.

If you do not have a partnership agreement in place, you may not be on the same page about these issues and the chances of a conflict arising are far higher. There also won’t be a clear plan in place for how that conflict should be resolved, which will make it difficult for you or a third-party (like a court) to determine an appropriate outcome. Serious problems could also happen if someone wants to leave the business or passes away.

The bottom line is, you’re betting the future success of your business — and your livelihood — on your relationship with your business partner. There’s no way you should do that without sitting down and hammering out the details of what that will look like and putting them into a written contract. This process alone can go a long way toward helping you confirm you’re on the same page and going into business together is indeed a good idea.

So, if you’re thinking of starting a company with another person, make creating your partnership agreement a top priority. Just because it’s not required doesn’t mean it’s not important.

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You might need a small amount of money to cover an unexpected bill. Is a personal loan your best bet? Read on to find out. 

There may come a time when an unexpected bill lands in your lap. Maybe you need $1,000 to cover an emergency car repair. Or maybe you need to replace your washing machine out of the blue and you don’t have $1,000 just sitting around in your savings account. Seeing as how 63% of Americans don’t have enough cash on hand to cover an unplanned $500 expense, reports SecureSave, it’s easy to see how you might land in that boat.

If you need access to $1,000, you may have different options. Your credit card might let you take a cash advance, but that could be expensive. You can also look at charging your $1,000 expense on your credit card and paying off the balance over time.

But you may be inclined to look at a personal loan for a few reasons. First, personal loans offer the benefit of fixed interest rates, whereas interest on a credit card can be variable. The rate a credit card charges you can also be significantly higher.

Plus, personal loans allow you to borrow money for any purpose. And they tend to close pretty quickly, which is a good thing if you need money in a pinch. But while a personal loan could be a good solution in theory when you need quick access to $1,000, you might hit a snag for one big reason.

When your borrowing needs aren’t high enough

Some people take out personal loans for $10,000 or more. But if you only need to borrow $1,000, you might run into an issue with a personal loan, since these loans often impose a borrowing minimum.

Why would a lender insist that you borrow more money when you’re willing to borrow less? It’s simple.

Personal loan lenders make money by collecting interest. And they also spend time and resources to put loans in place. The amount of interest they stand to make needs to be worth that effort. A $1,000 principal may not be worth it to some lenders, so you may find as you shop around that you don’t have many options for borrowing such a small sum.

That doesn’t mean you won’t find any options, though. There are lenders who write smaller personal loans. But because you’re whittling down your pool of options, you may end up with a higher interest rate on your loan than you’d like.

Plus, you should know that borrowing rates are up in general right now following the Federal Reserve’s interest rate hikes that started last year. So even if you’re borrowing a larger sum and can find 12 different lenders to write you a personal loan for the amount you need, you could get stuck with an interest rate that isn’t as competitive as expected.

Is there a better option?

If you only need to borrow $1,000 and are struggling to secure a personal loan because you’re not asking for a very large loan, then one option to consider instead is a 0% interest credit card. These cards can be dangerous because they only come with 0% interest for a limited period. And once that period expires, you could be looking at a very steep interest rate on your balance.

However, let’s say you find a 0% interest rate credit card with a 15-month introductory period. It’s conceivable that if you’re only borrowing $1,000, you’ll be able to pay off that debt in that time frame, especially if you’re only tackling your principal and don’t have interest to worry about. You’d need to make payments of just $67 per month to pay off $1,000 within the 15 months in this instance.

Of course, another option may be to ask a family member or friend for a loan. That, however, could make for an awkward situation, so you’ll need to weigh the pros and cons of doing so.

All told, a personal loan could be an option if you need to borrow $1,000. But don’t be shocked if most lenders tell you they won’t write a loan that small.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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A recession probably shouldn’t influence whether you roll over your 401(k). Read on to find out why an IRA could be a good option no matter what the economy is doing. 

When an economic downturn comes around, it’s easy for investors to get jittery. People naturally assess a new situation — like a recession — and try to figure out how they should respond to it.

Investors understandably take a look at their 401(k) and wonder if rolling it over to an individual retirement account (IRA) is the better option. Considering that 68% of Americans think a recession is around the corner — and 80% of that group believe it will be as bad as the 2008 downturn — some workers may likely be considering such a move.

So, let’s take a quick look at the benefits of rolling over your employer-sponsored 401(k) to an IRA — and why the economy shouldn’t be a driving force in your decision.

A recession shouldn’t dictate your 401(k) rollover plans

Some people consider rolling over their 401(k) to an IRA because they want to feel like they’re taking some control over their investments when the economy isn’t doing well. Gaining control over your investments can be beneficial, as long as you’re not panicking.

One of the key benefits of moving your 401(k) into an IRA is that you will have more investment options. For example, you can buy individual stocks or choose from a long list of index funds in an IRA — compared to the typically pre-selected funds you can choose from in most 401(k)s.

If there’s a recession and stock prices tumble, you may be able to allocate your money in a more diversified way through your IRA compared to an employer-sponsored 401(k).

I did this — admittedly, entirely by accident and not trying to time the market — when the stock market dipped at the beginning of the pandemic. I already planned to roll over my old 401(k) to an IRA and happened to do so when the market fell, and then put the money into an index fund and some stocks. While my investments rebounded when the broader market did, they probably would have done so in the 401(k) target date fund I was previously invested in as well.

If you want more control over your investments, it shouldn’t matter whether there’s a recession. Focus instead on what investments you want to own, and try to avoid panic buying or selling, so you can stay focused on your long-term goals.

Here are a few tips if you’re thinking of rolling over your 401(k)

If you’re planning to roll over your 401(k), there are a few things you should keep in mind before you do, and some reasons why it could be a good idea.

1. Consider your motivation

Vanguard says on its website that you should consider your motivation when thinking about an IRA rollover. The investment firm noted that some people nearing retirement may move their money into an IRA to gain more clarity about their investments. “Putting all your retirement savings in one place makes it easier to manage your accounts and monitor your progress,” Vanguard says on its website.

2. You’ll have more investing options

I mentioned this earlier, but it’s worth repeating: You’ll have a lot more investment options with an IRA. Most 401(k)s have limited investment options, which may include target-date funds. While that’s not necessarily a bad way to invest, an IRA will give you the option of buying individual stocks, bonds, certificate of deposits, mutual funds, and exchange-traded funds (ETFs).

3. Keep your eyes on the horizon

No matter what’s going on with the economy or the stock market, it’s always best to keep a long-term perspective on your investments. If that’s your motivation for rolling over your IRA, then you’ll be more likely to choose investments that will help you grow your money over time, instead of having an emotional reaction to the stock market’s performance or a recession.

In short, if you’re considering rolling over your 401(k) to an IRA during a recession, ensure you’re doing it for the right reasons. There are some clear benefits to having your money in an IRA account — but those benefits exist whether there’s a recession or not.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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