28/10/2022
Are you considering starting a business with your friend? It is often believed that good friends will be great at doing business together. However, history has shown us that this is not often the case. Many legal disputes arising from failed business relationships happen because the business parties are friends and had not build their business on a firm foundation.
Here are the top 5 essential tips for starting a business with a friend:
1. The essential agreements
Do not fall into the trap of settling with verbal contracts, aka. handshake agreements. It is important to have a proper shareholder agreement, co-founder agreement and even a non-disclosure agreement, which will establish certainty, safeguard your interest, and reduce the risk of a lengthy and costly dispute in the future.
2. Put everything in down in writing
Many people underestimate the usefulness of an operating agreement. This type of agreement usually includes a detailed business plan, outlining the decision-making authority and process, the duties and responsibilities of each party, how conflicts are to be resolved, how profit and losses are to be split, etc. It should also include an exit strategy with clear separation and buyout clauses.
3. Incorporation
Depending on the needs of your business, you may wish to form a partnership or incorporate a company. Incorporation is highly recommended so that you can protect your personal assets through limited liability, as well as enter into business contracts under the company’s name.
4. Share bookkeeping and record keeping responsibilities
It may be tempting to leave all financial aspects of the business to one party, especially when you do not have a financial background. However, all parties involved in the business should have access to the financial information and records. Diligently monitoring the financial performance and position of the company can help you to avoid unpleasant surprises in the future.
5. Keep communication frequent and open
Friendships often get in the way of proper and formal conversations which are necessary for the healthy growth of a business. It is crucial not to avoid any difficult conversations, because this may lead to greater problems in the future which could have huge cost implications.
Done the right way, starting a business with your friends could be a rewarding process. Therefore, we highly recommend obtaining professional legal advice from the beginning. At AHL Legal, we have the expertise to assist you in your commercial endeavor. Please do not hesitate to contact us today for a consultation with our experienced solicitors.