One of the most common questions I hear from people starting a business is "Should I be a sole-proprietor, LLC, S-Corp or C-Corp and what's the difference?"
One of the most unasked questions is "Should I have a contract / operating agreement / buy sell agreement with the person I'm going into business with?"
There are many factors involved in the first question, but only one for the second. Should you have such an agreement with your business partner? Yes - Emphatically YES! I can't stress the importance of this. I don't care if you are best friends. I don't care if you are brothers - identical twins, that grew up never fighting and would die for each other. This is a must have.
While everything might seem like a marriage made in Heaven today, the chances are that there will come a time when someone will want out or need out of the business. It is at this time that the agreement gets pulled out and acts like a prenuptial between the two partners who are married through the business. Without it, chances are you will end up in the business equivalent of divorce court.
Here are the general scenarios I usually use to convince people of the importance:
- One of you decides you get tired of the business
- A better opportunity comes along for one of you and you need out to pursue the other opportunity
- One of you decides to retire and wants the other to buy them out.
- Your partner dies unexpectedly and his will gives his share of the business to his wife, who wants nothing to do with the business nor does she have the expertise to run the business.
- Bottom line, the future is uncertain and you never know what tomorrow holds - both good and bad.
If they say "Gosh, I guess we should look into doing that sometime in the next year or so." I say, "Gosh, you're an idiot and should really do that this week before any of those 5 things have a chance to occur."
I've seen some (and heard more) horror stories of business partners with good intentions but no agreement get started fine, but end in "custody battles" worse than a Hollywood divorce. How much easier it would be to pull out a piece of paper that you both signed and read word for word how to handle the situation.
Yes, it will cost you a few hundred dollars to have an attorney draft up the thing. So? Even if it costs you $1000, it will be the best $1000 you've ever spent to save the friendship you enjoy today.
I know this analogy of marriage, divorce and business is a little crude, but honestly, if 50% of the marriages end in divorce and 50% of the businesses fail in the first 5 years, what do you think the chances of your business partnership lasting "till death do you part"?