Key Takeaways

  • A friendship contract is a legally binding agreement that outlines the roles, responsibilities, and expectations of business partners who are also friends.
  • A contract differs from an agreement in that it includes legally enforceable obligations.
  • Clearly defining roles and responsibilities, exit strategies, and dispute resolution methods can prevent conflicts.
  • Business plans help structure a partnership and set expectations for operations, decision-making, and financial contributions.
  • Filing partnership paperwork ensures legal recognition and can protect personal assets.
  • Enlisting a neutral third party, such as a mediator or attorney, can help maintain fairness and professionalism in business matters.
  • A friendship contract should address financial contributions, profit-sharing, dispute resolution, and exit strategies.
  • Consulting a lawyer on UpCounsel can help draft a contract that safeguards both business and personal relationships.

A simple business contract between friends protects the relationship by separating the business and friendship. The oral or written contract lists each party's obligations as it relates to the business and one another. Breaching the contract is against the law and can lead to a lawsuit. While it's possible to write a basic contract on your own, consulting an attorney for business contracts to get professional Insight regarding the process is advisable.

The Difference Between a Contract and an Agreement

Agreements and contracts aren't the same things. An agreement is used to describe something that two parties agree on for something basic, like agreeing to take a walk together. It's not a legally enforceable agreement because there was no consideration exchanged between the parties.

With a contract, consideration is exchanged for all parties involved. As an example, you might go shopping and buy something at the store and pay the store owner for your purchase. For the store owner, the money is the consideration that he or she gets. The consideration that you get is the item that you buy.

Why a Friendship Contract Matters in Business

A friendship contract, also known as a business agreement between friends, serves as a safeguard against misunderstandings and financial disputes. Many friendships have been strained or ended due to business conflicts that could have been avoided with a well-drafted contract. Key benefits include:

  • Clarity in Roles & Expectations – Prevents ambiguity by detailing each partner’s duties and contributions.
  • Financial Protection – Defines ownership percentages, profit-sharing, and liability limitations.
  • Dispute Resolution – Outlines conflict resolution methods, such as mediation or arbitration, to handle disagreements professionally.
  • Exit Strategies – Specifies what happens if one partner wants to leave or if the business dissolves.

The Steps in Writing a Contract

There are four main steps to writing a simple business contract:

  1. Provide a written summary of the legal names and addresses of the parties entering into a contract.
  2. Put all of the contract terms and conditions in writing. Include information on the consideration that each party is agreeing to deliver.
  3. Put the penalties that will apply if either party doesn't fulfill their part of the consideration in writing. Also, note in writing what will happen if the consideration fails to be met repeatedly or if the contract is deliberately breached. It's important to note that the authority to proceed with litigation must be in the written part of the contract.
  4. Detail in the contract that all parties involved have read the document and approved of the contract. This is important because if there's a disagreement and the case goes to court, neither party can claim they didn't know about the terms and conditions of the contract.
  5. The contract must be signed in front of witnesses who also sign the contract.

Essential Clauses for a Friendship Contract

To ensure that a friendship contract is effective, it should include the following essential clauses:

  1. Identification of Parties – Full legal names and addresses of all involved parties.
  2. Business Purpose – A clear statement of the type of business and objectives.
  3. Financial Contributions – Details on initial investments, profit-sharing, and expense allocation.
  4. Decision-Making Process – How key business decisions will be made (e.g., majority vote, unanimous agreement).
  5. Dispute Resolution – Mediation, arbitration, or legal action processes if disagreements arise.
  6. Exit Strategy – What happens if a partner wants to leave or if the business dissolves.
  7. Non-Compete & Confidentiality – Restrictions on competing businesses and handling sensitive information.

A well-drafted contract minimizes risks and ensures the business relationship remains professional and legally sound.

Advantages of Writing a Business Plan

When you're going into a full-blown business endeavor with a friend, it should always begin with a detailed business plan. The business plan helps you navigate through important details about your business so you can evaluate them properly. These details include things like:

  • How you'll develop your business.
  • How you'll manage your business.
  • How you'll finance your business.

Make sure your friendship doesn't stand in the way of making good decisions for your business. As an example, if one of you is great at coming up with ideas but tends to put things off, include how you'll handle that when running the business on a day-to-day basis and list how duties and responsibilities will be assigned.

Spell out what roles both you and your friend will play after the business has been launched. Also, put in writing how you will handle it if later on one or both of you decide you want out of the business as well as how you will handle it if you have a big disagreement about how to do something.

How to Address Business Growth in Your Friendship Contract

While initial contracts focus on launching the business, a well-prepared friendship contract should also address future growth. Consider including:

  • Scalability Plans – How business growth will be funded and managed.
  • New Partner Admission – Criteria for adding investors or partners.
  • Profit Reinvestment – Guidelines for reinvesting profits into the business.
  • Roles Evolution – How responsibilities may shift as the business grows.

By planning for growth, the contract remains relevant even as the business expands.

Filing Partnership Paperwork

File the paperwork through your local business licensing office when forming a partnership. Filing the paperwork formally sets up the partnership and gives it a more businesslike feel instead of feeling like two friends are just hanging out together.

An incorporated business has financial and legal protection that a sole proprietorship or partnership doesn't have. This means with a partnership, you and your friend are going to be liable on a personal level for debts incurred by the business.

Protecting Your Personal Assets in a Business Partnership

Many friends start businesses without considering the potential financial risks. In a friendship contract, it’s crucial to outline legal structures that protect personal assets. Options include:

  • Limited Liability Company (LLC) – Shields personal finances from business liabilities.
  • Partnership Agreement – Specifies financial responsibilities and liability limitations.
  • Business Insurance – Helps cover potential losses, lawsuits, or damages.

Proper legal structuring prevents personal financial burdens in case of disputes or debt.

Enlist a Neutral Third Party

Putting your personal assets on the line in a partnership with a friend requires a huge amount of trust on both parts. It can be important to put your personal feelings about the friendship aside so that it doesn't affect the way the business finances are managed. One option is to bring in a neutral third party who is capable of overseeing financial agreements so that they don't let issues with the business creep in and affect your friendship.

Seeking Legal Guidance for Your Friendship Contract

Even with the best intentions, business arrangements between friends can become complicated. Consulting a legal professional ensures the contract:

  • Complies with State Laws – Different states have varying contract requirements.
  • Covers All Possible Scenarios – Including financial risks, tax obligations, and partner exit strategies.
  • Is Enforceable – A lawyer ensures that the contract can hold up in court if disputes arise.

Frequently Asked Questions 

1. What is the difference between a friendship contract and a business partnership agreement? A friendship contract is a legally binding agreement designed to formalize business arrangements between friends, while a business partnership agreement is a broader legal document governing all aspects of a formal business partnership.

2. Can a friendship contract be enforced in court? Yes, if properly drafted and signed by both parties, a friendship contract can be legally enforceable, especially if it includes consideration (exchange of value) and follows state laws.

3. What happens if my friend breaches our friendship contract? If a breach occurs, the contract should outline the steps for dispute resolution, such as mediation, arbitration, or legal action.

4. Do we need a lawyer to create a friendship contract? While you can draft a basic agreement on your own, consulting a lawyer ensures it is comprehensive, legally sound, and enforceable.

5. How can a friendship contract help preserve our relationship? A well-structured contract prevents misunderstandings by clearly defining financial responsibilities, roles, and dispute resolution methods, reducing the risk of conflicts that could damage your friendship.

You can find experienced attorneys on UpCounsel to help draft or review your friendship contract, ensuring both your business and personal relationship are legally protected.

If you need help with a simple business contract 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.