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Are you starting a business with a family member or a close friend?
I know, I know. You are incredibly excited. You have a winning, million-dollar idea, and you are pursuing it with one of your favorite people. What could go wrong?
Well, unfortunately, much can go wrong and sometimes it happens very quickly and unexpectedly. Let me play the heavy here and give you a strong dose of advice you can’t afford to ignore. Even if you have total faith that love conquers all, blood is thicker than water, no one understands you like your college roommate or your favorite Aunt Edna…the reality is that if you want to preserve your own interests and also preserve the relationship, you must heed my advice.
Yes, okay, I’ll get on with it.
I am begging you, for the love of chocolate and all that is good, at least to do the following:
1. Have a written Partnership Agreement, LLC Operating Agreement or fully fleshed out Articles of Incorporation and Bylaws (if you are going to incorporate). Merely forming the entity with the state is not enough. And if you are pursuing a partnership, which doesn’t necessarily require the formation of a formal entity with your state, this point is even more critical, since the only evidence of your intentions going into the business is the partnership agreement.
2. Hire separate (this point is so important, I will say it again: separate) lawyers to negotiate and draft those agreements/documents. This will cost you a bit of money on the front end, but it will ensure that you (and each of your business partners) have someone dedicated to thinking about how the business should be structured and operated so that your interests are protected. The harsh reality is that there could be a moment in time when what is best for you is not best for your business partner. This is called a conflict of interest, and it exists merely because of the potential for a future divergence in interests among or between the business partners. Now, one lawyer can certainly represent all parties as they enter into an agreement that governs their new business. But, if you choose to use one lawyer, make sure that lawyer explains the conflict of interest to each of you and has you sign what is called a “Conflict Waiver.” The point of this is to make sure that each person represented by the same lawyer understands the risk she faces by not having her own lawyer dedicated to thinking only about her best interests.
3. Make sure the agreement/documents deal specifically with how you will divide assets or sell your interests if you want out or if the business goes under. The key to this is determining percentages of ownership, and then how those interests and how the company assets will be valued and then distributed or purchased by the other partner. You must also decide now how you will determine who owns the rights to your company’s intellectual property, brand and trademark. As for valuing the assets or interests, there are specific valuation formulas you can choose from, and a good business lawyer or CPA can assist you with which one is best for you.
4. Make sure the agreement deals with succession issues. Who gets your shares/interests if you die or become incapacitated? Do you want your kids or spouse to take over the business once you are gone? Not fun to contemplate, but critical to think it through now while you have a clear head that is full of optimism. Don’t leave that mess for your loved ones to figure out after the fact. The very best time to come up with creative and effective solutions is when everyone is happy and hopeful for the future of the business.
5. Actually sign the agreement and date it. You can’t imagine how many people forget to do this. I’ve seen more problems with my own clients come from this one issue. Clients come to me already in a dispute with a business partner, and while they intended to get the partnership or LLC Operating Agreement in place before they started operating, they only succeeded in getting the entity formed with the state, but forgot/put off/couldn’t get the agreement fleshed out and finalized. Now, they are fighting with their once beloved partner and there are no clear rules on how to resolve the dispute. A well crafted LLC Operating Agreement or Partnership Agreement will provide the rulebook that would govern how most disputes are to be resolved. Without that rulebook, the parties will spend a huge amount of money hashing out a resolution in negotiations or litigation, or one will eventually decide to swallow their losses and walk away frustrated and/or broke. This scenario can be almost entirely avoided with good, separate representation and a commitment by all parties to get the paperwork in order and signed before you begin operating.
Okay, so I’ve oversimplified a lot here, but I want to make it as simple as possible so you will follow my advice. Once you do, your newly hired, fabulous and experienced business lawyer and/or CPA will be able to point out that there are even more details to attend to before you launch, but they will be in the best position to know what details are critical to your specific situation and business.