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Doing business with friends or family

| Aug 11, 2020 | Starting a Business |

If you decide to go into business with a friend or family member, you should think twice and then get your deal documented better than you would need to with a stranger.  As with most of our blogs, this was preceded by another “typical” call from a real client or prospective client.  She had gone into business with her best friend.  One of them set up an LLC with the State, but they didn’t want to spend money on a lawyer—after-all, they were best friends. The business has been operating for two years, with everything being done informally.  To the extent they have records, they were maintained by the “other” partner on a “shared” cloud drive.  For the last few months, the business has actually been making some money, but certainly not enough to offset all the months they slept in the business premises because they could not take out enough “income” to pay rent.

Recently, the “other” partner came to feel, apparently without clearly communicating it, that she was doing a disproportionate part of the work; or alternatively, that the “first partner” was not carrying her share and was taking a disproportionate amount of money to pay personal expenses.  The “other” partner has now changed all of the passwords to all of the cloud accounts (document drive, banks, email, etc.) and locked the “first” partner out of the business premises.  The “first” partner believes the business is worth more than half a million dollars and offered to buy the “other” partner out based on that estimate.  The “other” partner ignored the offer.  Still, everything remained verbal.  Not one written document.  At this point, they cannot even agree on their percentages of ownership.

Now, the “first” partner wants to regain access to the business records and assets and to have the partnership dissolved.  It sounds like a simple problem, but we had to explain to the “first” partner that a lawsuit to dissolve it could cost many tens of thousands of dollars (for each side) and that the business might not be worth anything to the winner, after spending potentially years in court.

The rest of the “partners’” story has not been written.  It may never be.  The cold hard reality is that two people have lost their best friends, they have probably lost a business worth several hundred thousand dollars, and they may have to spend an enormous amount of money to just sort out who gets the bones.

A frustration we, as lawyers, deal with daily is that people assume a friendship will solve all problems and that they do not need to plan or protect themselves or each other with appropriate documentation of their deal.  A proper Operating Agreement would specify the percentages of ownership, what happens if one partner puts in more money or more effort than the other, what happens with books and records, who has access to what, how decisions are made, what happens if there is a minor disagreement, what happens if there is a huge disagreement, what happens if one partner dies, and a procedure for dissolving the business if things go really bad.  You can almost think of it as a business prenuptial agreement.  You hope you never need it, but if you do it is your best friend.

In the case described above (by the way, the facts are “adjusted” so that, if you were the one who called, you may not recognize yourself), an agreement that would have cost a few hundred dollars at the beginning could have saved a friendship, a business with significant value, and a whole bunch of other relationships that invariably intersect with the “partners”—families, friends, customers, and suppliers.

It is possible for you to avoid the pitfalls of going into business with friends or family and enjoy the rewards of a successful business.  One small investment that will make a huge difference later is to have your business relationship documented.  If you agree before you start and get the agreement written down and signed, the chances of your business surviving, along with your friendship, vastly improves.  A call to an experienced small business attorney can be the best call you can make.