Key Takeaways

  • A clear business relationship contract protects friendships and business goals.
  • The contract should define roles, contributions, dispute resolution, and exit strategies.
  • Choosing the right business structure (e.g., partnership or LLC) is crucial.
  • Address ownership shares, profit distribution, and intellectual property from the outset.
  • Maintaining boundaries between friendship and business is key to long-term success.

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.

What to Include in a Business Relationship Contract

Creating a business relationship contract helps preserve both the business and the friendship. Here are essential elements to include:

  • Business Purpose: Clearly describe the nature and goals of your venture.
  • Partner Roles and Responsibilities: Detail who handles what. This can include job titles, areas of authority, and specific duties.
  • Financial Contributions: Specify how much each partner is investing and how future contributions will be handled.
  • Ownership Interests: Outline each partner’s ownership percentage and equity.
  • Profit and Loss Distribution: Clarify how profits and losses will be shared—equally or proportionally.
  • Decision-Making Process: Decide how key business decisions will be made (e.g., unanimous vote, majority, managing partner).
  • Conflict Resolution: Include a clause for resolving disputes, such as mediation or arbitration, to avoid personal conflict escalation.
  • Exit Strategy: Define how a partner can exit the business and what happens if someone wants to sell their share or becomes incapacitated.
  • Non-Compete and Confidentiality: To protect business interests, consider including terms that limit competition and safeguard sensitive information.
  • Signatures and Date: Ensure all parties sign and date the agreement to make it enforceable.

A strong business relationship contract helps prevent misunderstandings and fosters long-term clarity and trust.

Incorporation Status

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.

Choosing the Right Legal Structure for Friend-Based Businesses

Selecting the right legal structure plays a crucial role in limiting liability and formalizing the partnership. Common options include:

  • General Partnership: Easy to form but offers no liability protection. Both partners share profits, losses, and legal responsibilities.
  • Limited Liability Company (LLC): Offers liability protection and tax flexibility. It’s often a preferred choice for friends starting a business together.
  • Limited Partnership (LP): Includes general partners who manage the business and limited partners who invest capital but have no management control.
  • Corporation (C or S Corp): Provides the highest level of liability protection but involves more formalities and regulatory requirements.

Even among friends, formal registration shows professionalism and seriousness. Registering as an LLC or corporation also allows the business to own property, open a bank account, and enter contracts in its name.

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.

Communicating and Setting Expectations

The foundation of any successful business partnership, especially between friends, is clear communication. Before problems arise:

  • Set Boundaries Early: Decide how to separate business and personal interactions.
  • Schedule Regular Check-ins: Create a routine for reviewing progress, discussing concerns, and refining goals.
  • Revisit the Contract: Regularly review and update your agreement as the business evolves.
  • Create a Dispute Resolution Clause: Specify how disagreements will be addressed to avoid conflict escalation.

An upfront conversation about expectations can prevent misunderstandings and protect your personal bond.

Frequently Asked Questions

  1. Do you really need a contract when starting a business with a friend?
    Yes. A business relationship contract outlines rights, duties, and expectations, protecting both the business and your friendship from future disputes.
  2. What’s the best business structure for friends starting a company?
    An LLC is often a preferred structure because it combines liability protection with flexible management and tax benefits.
  3. How do you handle disagreements in a business partnership with a friend?
    Include a dispute resolution clause in your contract, such as mediation or arbitration, and commit to open, honest communication.
  4. Can a friend back out of the business at any time?
    Not without consequences. A well-written contract should include an exit strategy that explains buyout options and responsibilities.
  5. What happens if one friend contributes more money or time than the other?
    The contract should specify each partner’s contributions and how that impacts ownership, profit sharing, and decision-making authority.

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