By Dr. Jim Dahle, WCI Founder
It's been said that a partnership is the only ship that won't sail. Mixing finances and business with family and friends is a good way to both lose money and damage relationships. The problem with a partnership is the natural human tendency to view your efforts and contributions as being larger and more important than your partner's. If you really want to have a problematic partnership, split it 50/50. At least in a partnership with a clear majority partner there is an obvious boss who calls the shots. The minority partner might not like the outcome, but the fight ends pretty quickly.
Other Options Besides a Partnership
While a partnership might be the first business structure that comes to mind when you think about working with someone in a business, there are other options.
As mentioned above, a partnership with a majority and a minority partner can clarify disagreements about what will be done when the partners have different opinions.
The business can also be set up with one owner and one employee. With the right employment contract, that is likely to be an acceptable option even for the employee. Including stock options (for a corporation) or a profits interest (for an LLC) solves the issue of the employee not benefiting from substantial business growth. Bonus structures can also help to align interests. Creativity can eliminate a lot of future problems that predictably show up with the “default” 50/50 partner structure.
Why Being in a Business with a Friend Can Be Helpful
It's easy to understand why people want to go into business with their friends. There are a lot of advantages.
Trust has already been established and trust goes a long way to solve problems. When you know someone will do anything for you, you feel as though they'll be less likely to hurt the business that you own part of. Trust is like a bank and if you make little deposits for years and years, there will be enough in there to make a big withdrawal from time to time.
One reason people take on a partner is simply because they don't have the time to do it all themselves. Splitting the time required to be inserted into the business may make the otherwise impossible business possible, or at least easier.
Time is a limited resource and so also is capital. For the same reason a start-up may bring in investors, so a small business may bring in partners. In fact, in many partnerships one partner provides more of the time and the other partner provides more of the capital. That's not necessarily a problem so long as the agreement of what each partners will do is clear and in writing.
We all have different skills sets and this is one of the best reasons to go into business with another person. In the best partnerships, each member specializes in what they are best at.
Fun and Companionship
There's a reason the two of you are friends and business can be scary. It's less scary when you share it with somebody else. Business can be a lot of fun. You'll spend a lot of time together. Some business partners become friends over time, but why not start with a friendship already in place?
Tips for Working with Friends
If I haven't yet managed to talk you out of a partnership, or if you've decided to still work with friends on a business in a different structure, here are some tips.
The most important part of any partnership is the people in the partnership. Go into business with the wrong people and it doesn't matter how well-written the contract is. That said, the more clear and comprehensive the contract or partnership agreement is, the fewer problems you will see down the road. Like any good contract, first agree verbally about what you want to do, then make sure the contract encapsulates all of the verbal agreements. An experienced business attorney can likely make some additional suggestions for things to consider and include, but discuss these verbally rather than surprising each other with contract clauses. Whether an LLC operating agreement, a partnership agreement, or an employment contract, each partner should have it reviewed by counsel whose only fiduciary duty is to that partner. This agreement should clearly state how future disputes should be resolved, avoid vague language, and specifically describe how and when the partnership will break up.
Any relationship and any business requires time. Meet regularly to discuss the business. Tackling thorny issues early before they grow out of control can keep them small.
Prioritize the Friendship
It really helps when neither friend needs the money. However, that can be difficult, not only when the business is doing poorly, but also when it does surprisingly well. While both partners might have been financially independent when the business started, if it grows to become a large percentage of their wealth, there is still something worth fighting over. A commitment to the friendship first, coupled with a spirit of generosity, goes a long way.
Continue to Do Friend Stuff
Over time, the relationship often changes from being friends into being business associates. It's critical to maintain the friendship too by doing non-business stuff together frequently. Go on trips and engage in the activities you did before going into business together.
Ideally, the underlying friendship makes for a stronger business, but the business may also deepen the friendship. Communicate well, act with integrity, plan carefully, and be generous and going into business with a friend might be the best decision you ever made.