Friends to Business Partners: Read this before you start your online boutique with a friend
I often get clients who have decided to partner with a friend to start their online boutique. Being in a partnership can have many advantages split cost, splitting the work, having someone to work on ideas with, and just plain old fun. But we rarely think of the legal stuff of entering a partnership and protecting ourselves in case the partnership splits. I’m not a legal person so I turned to my good friend Merissa V. Grayson, Esq and asked her to give us some tips on how to start our online boutique with a friend but still protect your business interest. Hope enjoy Merissa’s piece, leave her a quick comment and let her know if this helped or any other legal questions you have.
Doing business can be a lot more satisfying when you team up with a partner. The excitement is even greater when your potential partner is a long time friend or someone you know.
Unfortunately, existing friendships/relationships lead Entrepreneurs to mistakenly believe that handling all of the “formalities” associated with a partnership aren’t necessary. After all, when you “know” someone, the last thing you think will happen is that things will go sour. The idea that you and your business partner are “cool,” “like-minded,” have been friends for years, etc. often overshadows the fact that friendship and business are two different things; the friendship hat must be removed and replaced with a business hat to ensure that everyone is on the same page, smart business decisions are being made and friendships aren’t ruined due to misunderstandings.
One of the biggest mistakes I see in business relationships, is the absence of a contract (or an existing contract that is poorly written.) This is especially true when it comes to partnerships. As a result of this mistake, misunderstandings happen, friendships/relationships are ruined, and businesses are destroyed. For this reason, regardless of your pre-existing relationship with your potential business partner, it’s important to be proactive and have a thorough partnership agreement that addresses what could become potential problems.
Although in most states, putting the terms of your partnership in writing isn’t required, it’s wise to have any agreements in writing to avoid unnecessary problems.
Here are the top 5 important clauses all partnership agreements should have:
- Management and Control- Who’s authorized and responsible for what? Do all partners have the same responsibility? Or are tasks delegated differently? What’s going to happen when there’s a disagreement as to a decision that one partner makes?
- Profits, Losses, Withdrawals, and Distributions- How are profits and losses going to be calculated and divided? When is everyone going to get paid? and what are the rules regarding withdrawals from partnership funds? (Can you just withdraw money freely?)
- Fiduciary duties/Competition Clauses- partners owe duties of good faith, fair dealing, and loyalty to each other, but what exactly would be considered a breach of these duties? (Am I breaching if I’m doing similar business on the side?)
- Required Consent- is there any specific action that requires consent of all partners? (I.e. if one of you decides you want to take out a $10k loan, do you all have to agree on it?)
- Disassociation, Dissolution, and Termination- What happens if one of you decides you want out? Can you just walk away? Can one of you be kicked out? If someone leaves, can business continue? Is a buyout required?
Before going into business with someone, it’s important that you sit down and have the difficult conversation about the things that could go wrong and how you would handle them. These are just a few of the types of questions you should ask when partnering with someone, and to prevent misunderstandings, always put it in writing.
Merissa V. Grayson, Esq. is a Lawyer, Author, Speaker, and Consultant that helps Entrepreneurs make smart legal decisions that protect their businesses and careers & align w/ their goals & objectives.
*LEGAL DISCLAIMER* The information contained in this article is for educational & informational purposes only and should not be used as a substitute for hiring a lawyer. If you need legal advice, you should hire a lawyer. As legal advice must be specifically tailored to the facts and circumstances of each case, this article does not constitute legal advice, and is neither intended to create nor does create an attorney-client relationship