Starting a Business with a Friend: Do’s and Don’ts

It is estimated that about 40 percent of business founders were friends before they became business partners.[1]But while starting a business with a friend can be a great way to secure your financial future, it can also put new and challenging pressures on your friendship. Below are some tips and tricks to help you maintain best business practices while growing your relationship with your friend.

Do: Agree on Ground Rules

Many schisms between business partners—friends or not—result from unclear or uncommunicated expectations. By getting some ground rules in place, you will be able to minimize conflict and ensure that you’re on the same page going forward.[2] Some of these rules may address:[3]

How your startup costs will be funded and recouped, especially important if one partner is the “money” partner and the other is the “labor” partner;
Who owns the business;
How disagreements will be resolved;
What decisions can be made without the other partner’s input;
What will be done with business profits; and
What happens if an owner wants to exit the business.

The discussions you’ll have with your business partner while getting these ground rules in place can be incredibly valuable. Major disagreements or differences in opinion at this stage can also be a sign that it may not be the right time to start this business—which, while disappointing, can be far less costly than realizing this after you’ve invested the startup costs.

Do: Get it in Writing

Starting any business can be a hectic, stressful time. It can be tough to remember and juggle all the dozens of new responsibilities you will have. By getting your ground rules and other agreements in writing, you will have one document that both you and your friend can refer back to with questions or clarifications.

This written partnership agreement doesn’t need to be a notarized set of bylaws, but can simply consist of a shared document that shows all edits. As your business evolves, you will be able to amend these documents to more accurately reflect your practices and goals.[4]

Don’t: Make Assumptions

The key to all good relationships lies in communication. Unfortunately, when it comes to friends, it can be even easier to make assumptions about their feelings, opinions, or plans. These assumptions can lead to resentment if they’re not articulated and corrected. For example, if you know your friend is a night owl, you may assume they will want to work late at the business while you take an earlier shift; your friend may plan to work this earlier shift to spend evenings with family.[5]

Don’t: Neglect Your Friendship

Jumping into a new business opportunity can often take a front seat to your friendship. However, it’s important to maintain your friendship outside work. In many cases, this means not allowing business conversations to dominate non-business times; you may even want to agree not to discuss non-urgent business matters outside the office.

Not only can this improve your work-life balance, but it can also ensure that you and your friend are able to keep the delineation between your work and friend selves.[6]

Important Disclosures:

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

[1] https://qz.com/work/1567915/how-to-start-a-business-with-a-friend-tips-for-co-founders/

[2] https://www.wsj.com/articles/BL-HOWTOSBB-4

[3] https://www.score.org/resource/7-tips-making-business-partnership-work

[4] https://www.lexology.com/library/detail.aspx?g=a5055dd7-3814-4e7b-a53b-c63beeaafeb2

[5] https://johnston-legal.com/2020/02/20/assumptions-in-business-partnerships/

[6] https://www.entrepreneur.com/article/226772