Starting a business with a friend sounds like a fantastic idea. You have a great relationship, are like-minded, and have certifications that together, make you a force to be reckoned with. While this seems like a utopia, it is very important to protect yourself and the business. Some things to consider are:
Perform a background check – you will both have access to money, accounts, and assets so it is wise to check for skeletons in their closet. The results of a background check could be the first red flag about forming a business with a partner.
Chose the right entity to form – Corporation, Partnership, Limited Liability Company (LLC), etc. These are the most common forms of business entities (and there are others) and each entity has certain benefits and limitations which should be consistent with your intentions and goals.
A business agreement drafted by an attorney is commonly described as a partnership or buy-sell agreement. It lays out the expectations of each partner, shareholder and/or member, profit shares or losses, responsibilities, and what happens to the business if one partner is no longer involved in the business. Partnership agreements should also include the following:
The exact name of the business. Verify with the state of registration that the name is available.
Start-up costs and assets. Document the amount of cash, property, and items brought into the business and by which partner, shareholder, and/or member. In the event of a dispute, this will prove the contributions of each.
Distribution of assets. Describes the terms of receiving a paycheck or shares. Detail how the shares will be allocated, a specific dollar amount or percentage, and how often. Likewise, if there are losses in the company, how will those losses be handled and brought back into the accounts.
Authority. State which partner, shareholder, and/or member has the authority to enter into a contract. Sometimes all partners have to approve and sign all contracts.
Death. Describe the method of how surviving owner maintains the business and compensating the deceased’s beneficiary’s for his interest in the business at death and how payment is to be paid (internally or insurance);
Resolving disputes. Decide ahead of time how disputes should be resolved in the future. Instead of heading straight to court, are you willing to try mediation?
A business arrangement can be compared to a high-profile marriage. Performing due diligence prior to the beginning of the relationship can save money, frustrations, and relationships. You may feel weird investigating your potential partner, shareholder, and/or member but you are not only protecting yourself but your future investment.
Having a knowledgeable business law attorney ready to guide you at all times can help your business run smoothly, keep your company healthy and your bottom line safe and secure. If you are entering into a contract, barter, or any written agreement or have questions about IRS reporting contact an experienced business law and transaction attorney. As a former accountant and attorney with the Treasury Department, Ronald A. Luzim is a proven and well-experienced business law attorney. He brings an integrative and holistic approach to his law practice. Please contact his Coral Springs office at 954-755-1500 for all your business-related needs.