OKAY. If you're on my email list, you have seen this before-- but it's SO important, I'm breaking a rule and re-posting it here.
Recently, at my "day job" doing the law thing (remember: Engaged Legal isn't a law firm-- it's an educational resource. Just to be totally clear! ) I've had an influx of ugly business disputes. This is when the partners of a business, be it a general partnership, LLC, or corporation, cant agree and end up suing each other.
In one case, the judge chastised everyone, saying:"The biggest mistake you made was going into business with a friend, with no written agreement. Friendship clouds the business relationship. You can't have the conversations you need to have when you're friends."
While I disagree that you can't run a business with a friend, I do agree with one thing: entering into any business relationship without a contract is a no good, very bad idea! (Don't take my word for it--Being Boss did a great episode on this very topic, which you can listen to here.)
What type of contract am I even talking about? It's some variation of a partnership agreement, which goes by different names and contains slightly different information based on your entity type. Whether that agreement is a simple 1:1 partnership agreement, an LLC Operating Agreement, or a corporation's Articles of Incorporation/ Bylaws, you need to make sure you've talked about and settled the following things before you start working together:
- How you're splitting profits and losses (50/50? 60/40?)
- How are you voting on important decisions?
- What happens if you disagree on something major?
- Who can incur debt/ spend money on behalf of the company?
- What happens if one of you pulls a Regina George and gets hit by a bus? (read: You die or is incapacitated). Where does your "share" of the company go? Through their will? Or to the remaining member?
- Who is in charge of "TAX STUFF?"
- What if someone wants out of the business?
While this list is by no means exhaustive, it's a good starting place to make sure you and your partner are on the same page. These are some of the biggest KILLERS I've seen in a business relationship. Addressing them on the front end makes sure we don't have a nuclear fall out on the back end, resulting in a lawsuit, lost profits, or complete liquidation (read: a judge cancels the company and sells all of it's assets) of your company. YIKES!
So how do you start having these conversations? And where do you go to get this done?
I suggest taking a day to just sit down and hash it all out, no holds barred. You each need to walk in with an open heart, mind, and the goal of creating a sustainable business that will benefit you both. Stuck on what you actually need to discuss? Scared of missing something big? You can check out our Pre-Partnership Workbook. This will help you determine if you're even on the same page.
You can always walk through this conversation yourself, but to get a complete operational document, you'll need to go talk to an attorney. Once you talk through the "big items" or fill out your workbook, take it to your local small business attorney. This is not a situation where you can DIY. The answers in this workbook will give your attorney a GREAT place to start, saving you time and MONEY.
No matter what, PLEASE, PLEASE, I am BEGGING you-- don't risk it by not taking this critical step! Get your legal self in order and get these docs drafted up front. Your dreams are too valuable.