Between family members, as well as friends, a well-prepared written agreement is best. This should be detailed covering capitalization, ownership, succession, and even death. Should your partner be unable to fulfill his duties, who in the line of succession will become your partner? It is not about mistrust, but about foreseeing problems and having an agreement to settle disputes. You also want a written agreement so the friendship or family relationship is not jeopardized. Also, in the event of death or accident, there may be no way to sort out what any verbal arrangement entailed.
As far as the pros and cons, there are several opinions, but clearly it is best to have things spelled out. Bob Lewis, who writes the business advice blog for www.infoworld.com, says, “There’s an old saying. Partners only fight under two conditions: when they’re making money and when they’re losing money.” He continues, “When two people form a partnership, it can make sense — if they’re trying to form a large enterprise and need to pool their resources to get it started. Otherwise, why do it? You can each incorporate as an LLC or S-Corporation and act as partners as much as you want — through a formal joint operating agreement (JOA) or through a handshake. Either way, you avoid creating a business entity that receives and distributes revenue to its partners and signs up for joint obligations.”
Lewis lists some of the more obvious pitfalls with a partnership:
- Each partner fails to value what the other partner provides to the joint venture.
- The partners disagree on how to handle a situation with a client.
- One partner is better at selling and doesn’t want to share the revenue equally with the partner who isn’t as good at landing clients.
- One partner is better at delivering results, or expends more effort creating them, and resents the other partner taking an equal share of the revenue anyway.
Jean Murray, who writes about business and tax law for www.about.com, acknowledges the pitfalls, but provides suggestions for avoiding them, “You have heard horror stories about working with family and friends, but you are sure it will work out. But you wonder what you should do to make sure you can work together in a business without destroying that relationship.
“Sit down and talk about who is going to do what job in the business,” Advises Murray. “Maybe you like doing marketing and your friend or spouse wants to do the accounting. Talk about what happens when one of you has to stay home with a sick child, or if your friend wants to take a vacation. Cover as many concerns as possible. Make a list of all types of contingencies.
“Create a written agreement, describing who does what, how much of the business each person owns, and listing what happens if someone wants to leave the business or if there are problems. And,” states Murray, “follow the same process for family or friends. You may not be able to save the relationship if the business starts going downhill and the person loses money, but you may be able to at least remain on a talking basis. Finally, remember ‘Business is Business’.”
Your SCORE counselor is an excellent resource for information on business partnerships. The Northern Arizona SCORE chapter provides individual free counseling and conducts several workshops throughout the year for aspiring entrepreneurs and small-business owners.
Published 12/11/11
