Business Contracts Between Friends: What You Need to Know
Business contracts between friends is a still legally-binding document between/among participants despite the personal relationship.4 min read
2. Incorporation Status
3. Maintaining Your Friendship
Updated November 24, 2020:
Business contracts between friends can seem like an ideal scenario, but a contract, even when all the parties involved know each other personally, is still a legally-binding document, one that spells out the responsibilities of all of the participants, as well as expectations and possible ways to resolve conflicts, should they arise.
While a contract between friends is ultimately not going to be any different than that of parties without a personal connection, there are some additional considerations to look at.
The Business Plan
While going into business with a friend (or, even working together on a short-term project) means entering into an agreement with someone with whom you share a mutual trust or respect, it can also serve as a breeding ground for personality quirks and character defects. As such, it can potentially test even the strongest of relationships.
Often times, friends may enter into a business venture with one another, thinking that there is no need for formal documentation; after all, you’re friends! However, to alleviate the potential for miscommunication or hurt feelings, down the road, having business plans and contracts in place is always advisable.
If looking to enter into a long-term business relationship (such as starting a business) with a friend, take the time to create a thorough and comprehensive business plan that clearly outlines the roles and responsibilities of each party. This may include:
- Each parties financial investment
- The day-to-day responsibilities of each person
- Any applicable job titles
- Each person's financial compensation
Most importantly, remember that you are starting a business. As such, you cannot allow friendship or your personal feelings to hinder making the best decisions for your company. This may mean having tough conversations at times. For example, you may need to address issues of vacation and personal time, especially during times in which the business is not being as productive or financially lucrative: it may mean that neither of you take vacation time, so you can focus on the health of the business. Additionally, do not shy away from having conversations about problems that may occur in the business that could have a negative effect on the friendship, and what you can do to avoid them or how you want to best go about handling them, should they arise.
Remember: resentments can hurt both a friendship and a business. As such, do not be afraid to address any and all necessary issues in the creation of the business plan.
Just because you are starting a business with a friend does not make it any less of a business. Therefore, it needs to be treated and started, as such. Essentially, this means that you will need to agree upon how your business is going to be incorporated. By taking all of the proper steps on a legal level, within your state, not only will you be abiding by the requirements of where you are doing business, it will make the whole venture feel more professional and business-like, and not just like two buddies trying to make some money.
If it is just going to be you and your friend, you may want to establish your business as a partnership. This can be pretty easily accomplished through your locality’s business office or the Secretary of State in the state in which you will be operating.
It is worth noting that a partnership as a business structure, does not provide the same financial and legal protections that a limited liability corporation (also known as an LLC) does, so both you and your friend will be held liable regarding the business’s finances. As this can require a tremendous amount of trust on both parts, it may be worthwhile to hire an outside, third-party, to take management of the company finances.
Maintaining Your Friendship
Before you were business partners, you were friends. Chances are, you both agree that the health and longevity of your friendship is just as important, if not more so, as the health and longevity of your new business venture. Some steps you can take to ensure that your friendship is not damaged or strained, include:
- Make a commitment to the separation of your business relationship and your friendship. For example, when you are having dinner and going to a movie on a Saturday evening, don’t talk about work. And, when you are at work, don’t complain about your spouse or your kids.
- Don’t put your mutual friends in the middle of any business disputes.
- Agree to honesty and transparency, should issues arise. If need be, bring in an outside party, such a mediator, to help resolve business issues in a way that will preserve both the business and the friendship.
If you need help with business contracts between friends, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.