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 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.

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.

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.

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.

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.

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