Starting a business is an exciting venture, and embarking on this journey with a friend amplifies your shared enthusiasm and vision. After all, if you have a strong personal relationship, it should be able to withstand the ups and downs of business ownership, right? Before diving in head first, acknowledge that along with the promise of success, challenges and disagreements will be inevitable. To ensure a harmonious and prosperous partnership, there are at least five critical considerations that must be made when starting a business with a friend.
- Clarify Roles and Responsibilities
One of the first steps in establishing a successful business with a friend is to clarify the roles and responsibilities of each partner. While it may seem like a straightforward arrangement initially, ambiguity in this area can lead to misunderstandings later. Outline who will handle specific tasks, from performance of day-to-day operations to execution of your strategic vision. Decide who will ensure regulatory compliance and maintenance of the business’s legal duties.
- Define Decision-Making Authority
Your vision may have started from the same point of view, but as the business evolves, attitudes toward future endeavors and risks are just as likely to change. Decide early on who has the final say in critical decisions. While a 50/50 split may seem fair, it can result in a deadlock when disagreements arise. To avoid standstills, establish a decision-making process that designates authority to one partner in specific areas or outlines a clear procedure for resolving disputes. Alternatively, consider having a neutral tiebreaker, such as a trusted third party or an advisory board, to step in when consensus cannot be reached.
- Plan for the Future: Dissolution and Exit Strategies
Envisioning the end of your business partnership may not be the most pleasant topic, but it’s essential to consider and plan for potential exit scenarios. For example, one partner may want to pursue a different business or career path. Or you may have different goals for the business long term. For these reasons, your initial planning should include discussing and documenting how your partnership may evolve or dissolve. Consider including the right of first refusal clauses, which allow one partner to buy out the other’s share before seeking external buyers. Determine how the business will be valuated and the specifics of the buyout process, whether through a fixed agreement or third-party valuation. Such exit plans will help prevent potential disputes down the road.
- Stay Informed About Tax Implications
Tax regulations for partnerships can change, and you must stay informed about these changes and their impact on your business. Seek professional advice from accountants or tax experts who can help you navigate the complexities of partnership taxation. Staying ahead of tax-related matters will prevent any unexpected financial burdens and ensure compliance with the law.
- Protect Against Insolvency
Safeguard your business from the risk of insolvency by establishing clear financial responsibilities and commitments. Determine how capital contributions will be made by each partner and create a financial plan that outlines the business’s financial health. This plan should address issues like debt management, reinvestment of profits, and how to handle financial setbacks. Regularly review the financial standing of the company to ensure it remains solvent.
Your Legal Team to Protect Your Interests
Starting a business with a friend can be a rewarding and successful pursuit, provided you approach it with clear communication and a well-structured partnership agreement. Although many business partnerships start off amicably, not all of them have the privilege of continued success while still preserving the friendship. To assist with these considerations, work with a firm that has extensive experience in business planning and litigation. The team at Baker Jenner is ready to help you and your business partner navigate the challenges of starting an LLC, so you can maintain the momentum of your collective entrepreneurial spirit. Call (404) 400-5955 to schedule a free initial consultation.
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