Successfully starting a business is an exciting time for any entrepreneur. And going into business with a friend or family member can be particularly appealing because you have someone you know, like and trust. However, any time money and risk are involved, relationships can be impacted. Here are five things to consider when going into business with a friend or relative:
Choose the Business Entity.
You should formalize the business. There are several types of business entities, but the form you choose will have implications on personal and business taxes, liability to each other and to third parties, and dictate what type of written agreement you should have with your business partner. Determining whether to form a partnership, Limited Liability Company (LLC), corporation, or non-profit should be made after consultation with a tax professional and legal counsel.
Formalize How the Business Relationship Will be Conducted.
Possibly the most important aspect of a business relationship is to be clear and specific about the roles and responsibilities of each member to the business. Depending on the entity form, each person’s responsibility to the business should be memorialized in an Operating Agreement or Bylaws. It sets how the business relationship should be conducted as well as how the company itself should be conducted. In the event that there is confusion or a disagreement on how to move forward with a project or investment, you and your business partner will be able to refer to the company agreement as a guide.
Management of Profits and Proceeds
Talking about money is one of the most challenging aspects of conducting business of any kind. It’s a sensitive subject, which is why everyone involved with the business partnership should be on the same page when it comes to getting paid. How the profits and proceeds should be distributed need to be clearly outlined. What percentage will each partner receive as part of profits, and now much of the revenue will go back into the business to invest in things like equipment, expansion, or renovations. One aspect that cannot be overlooked is how and when everyone is to be paid and how taxes from those incomes will be managed as well.
Create a Process To Resolve Disputes
Unfortunately, sometimes disputes are unavoidable. One reason the operating agreement is so integral to the partnership, is that it should also include the procedures and mechanisms that will be used to resolve disputes. When discussing “disputes,” they don’t necessarily have to be major disagreements that put your business at risk. A dispute resolution clause should provide the framework to resolve everything from a simple everyday disagreement to major disputes before relationships deteriorate.
Outline Protocol for Closing a Business or Transfer of Ownership
Everyone starts a business hoping that it will be a major success, but realistically, relationships end or life changes get in the way of continuing forward together or at all. Operating agreements should spell out how each person’s interests can be transferred to the partner or a third party. In the event that the business should cease to exist, it also needs to describe the procedure on how to close the business, liquidate assets, and distribute what’s left.
Our firm is here to help you avoid unnecessary disputes or at the very least, minimize the costs of the disputes. The Griffith Law Group, PLLC has successfully represented clients in several industries including transportation, food distribution, financial services, Information Technology (IT), and more. For a free consultation call (202) 499-5160