A lot may go wrong when friends establish a company together. Discover how to protect yourself and your company while collaborating.
What you’ll discover:
Is it a terrible idea to start a company with your friends?
What are the primary reasons why friends’ companies fail?
How can I safeguard myself while doing business with friends?
What must be agreed upon when starting a company with friends?
Establishing a company with friends might be a terrific way to get started. Working alongside friends may be profitable and enjoyable, but there may be some stumbling blocks along the road. You and your buddy, like everyone else, may have opposing ideas from time to time. How you react to and adapt to such differences may determine how successful your firm is.
Table of Contents
Is it a terrible idea to start a company with your friends?
Beginning a company is difficult, but it helps to have a good buddy at your side to help you work through the difficulties. The highs of being a successful company owner are enhanced when shared with a close buddy, and the lows are less severe.
Regrettably, some good friends make bad business partners. Going into company with someone who does not share your aims and beliefs, or who may not be ready for the responsibilities, might be a terrible decision. Making a Business Plan might help you assess the strength of your possible business partnership.
What are the primary reasons why friends’ companies fail?
Going into business with friends may sometimes harm both the friendships and the firm. It is possible that complications may arise if you and your pals cannot agree on essential features of the firm before beginning your enterprise together. The following are some red indications that a friendship cooperation may fail.
Issues of trust—If you’re excellent friends, you should trust each other. But, if one of your friends ends up taking advantage of or even stealing from the company, you may have a severe issue. Because you can’t constantly be present or see what everyone is doing, it might be difficult to trust that your partners will give their fair share and just take their fair share.
Uncertain personal life—In certain circumstances, one buddy may be on more firm footing in terms of personal money and relationships than another. Personal debt or irresponsible spending may be a concern when a buddy is in charge of more than just their personal finances or has access to the company’s bank accounts. Nevertheless, going through a divorce while still attempting to manage a company may put people in an unpleasant situation, particularly if the business is not well planned or protected.
In the absence of finance or skill, it is prudent to get into a company with a buddy who can give expertise, time, or money. Maybe they have a talent you lack, or they have resources you cannot get on your own. Getting into a company jointly for the sake of having fun is not a strong basis for a long-term enterprise. Friends who start a company together may seek to complement each other’s abilities or expertise so that they both contribute equally but in distinct ways to the business.
How can I safeguard myself while doing business with friends?
If you are beginning a company with friends, you should follow the same procedures as if you were starting a business with anybody else. You should examine credit reports and do a background check to ensure that any possible business partner is being truthful about their money and past.
Incorporate your firm—Even if you are going into business on your own, it is a good idea to incorporate your company. By incorporating your firm as a corporation or an LLC, you protect your personal assets from any obligations that the company may incur. Otherwise, you may be held personally liable for your friends’ errors and obligations.
Establish a company Partnership Agreement or Operating Agreement—Whether the firm is incorporated or operates as a partnership, an agreement outlining how the business will run is vital. A Partnership Agreement or Operating Agreement (if you formed an LLC) will govern how decisions are made, problems are addressed, and profits and losses are distributed. It may also cover the issues that may cause the firm to shut and how the assets will be divided if the business closes.
Establish business contracts for relationships—Whether you’re dealing with an independent contractor or a vendor, it’s a good idea to have a formal contract. Written contracts often outline everyone’s rights and obligations, as well as specific remedies in the event that anything goes wrong.
Distribute accounting and recordkeeping duties—
It’s tempting to delegate “bookkeeping” to one person, particularly if they seem to be competent. Everyone in the firm, however, should have access to and monitor financial and other corporate documents. Keeping track of how the firm is performing might help you avoid a lot of difficulties later on.
What must be agreed upon when starting a company with friends?
Communicating to your friends about potentially unpleasant situations ahead of time will save you a lot of time and heartache. Here are some examples of more delicate topics:
How will profits and losses be allocated?
What happens if the firm needs to be dissolved?
How will the business be funded?
Who will make day-to-day company decisions?
Who has the power to write checks?
What are the time commitments and participation requirements?
When you explore these points, you may discover that forming a business partnership is not the best option for you and your buddies. Knowing it early on is preferable than understanding it after a substantial amount of effort and money has been spent.