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Provided you haven’t started trading together yet. If you have, we’ll write down what you already do.
Going into business with someone you trust is a great start. It is also the reason most people skip the paperwork. The agreement isn’t about trust; it’s about the questions neither of you has thought of yet.
This guide covers what to agree before you start, how to choose a structure, and how to keep the agreement useful as the business grows.
Why friends need it most
Disputes between business partners are rarely about bad faith. They usually start with different assumptions. One person thought the split was equal; the other thought it reflected what each put in. One expected to work part-time; the other full-time. Without a written agreement those assumptions only surface when something goes wrong, and by then the friendship is under strain too.
The questions to answer now
Who owns what share, and what each of you is putting in: money, equipment, time, contacts or ideas.
Who makes which decisions, and what needs you both to agree.
How much time each of you will commit, and what happens if that changes.
How profits are paid out, and when, and whether either of you draws a salary.
Who owns the name, the website, the customer list and any designs or code.
What happens if one of you wants to leave, falls ill, dies or stops contributing.
Money in, money out
Write down whether money each of you puts in is a loan to the business or payment for a share. The difference matters if the business is sold or closes. Agree how and when loans will be repaid, and what happens if one of you needs to put in more money later.
Decisions
Day-to-day decisions can usually sit with whoever runs that part of the business. Bigger decisions, such as borrowing, hiring, signing a long lease or bringing in a new owner, should need both of you. Listing them now avoids an argument later about who was allowed to decide.
Leaving
The most valuable clauses are often about the end. How is a departing owner’s share valued? Can the other owner buy it, and over what period? Can the departing owner set up a competing business next door? Agreeing these while you are on good terms is far easier than agreeing them in the middle of a dispute.
Choosing the structure
The way you set up the business changes who is liable for its debts, how tax works and how easy it is to bring in an investor. The common options are:
A partnership: simple and inexpensive, but each partner is usually personally liable for the business’s debts.
A company: a separate legal entity, which limits personal liability in most cases and makes it easier to issue shares to an investor.
A trust or another structure: sometimes used for tax or asset protection, with more paperwork.
We set out the options side by side, in plain words, and work with your accountant on the tax side. We quote the set-up before we start.
What the agreement looks like
For a partnership it is a partnership agreement. For a company it is usually a shareholders’ agreement, alongside the company’s own rules. Either way, a good agreement is written in language you both understand, and is long enough to answer the questions above without trying to predict everything.
Keep it current
Read the agreement again when you hire your first employee, take on debt, bring in a new owner, or one of you changes how much time you give the business. A ten-minute review then avoids a long argument later.
Before your first meeting
Talk through the questions above together, and note where you agree and where you don’t.
List what each of you is contributing.
Decide whether you might bring in investors in the next few years.
Bring any documents you already have, such as a business plan or a draft agreement.
Your situation isn’t a short answer?
Daniel Kerr
A first meeting ends with a written plan and a fixed quote.
