You’re in love, and you’ve proven over and over again that you can work through issues by trading off and balancing strengths and weaknesses. And so you and your partner decide to go into business together.
It makes sense to think a healthy romantic relationship leads to a healthy work partnership, but this type of entrepreneurship should be approached with the same legal care and personal boundaries as any enterprise if you want the business and your relationship to stay afloat. And, as any lawyer can attest, you want to plan for the worst while things are at their best. Here’s what to consider before calling your significant other your business partner.
Make It Official
I’m not talking about getting married — I’m talking about making your business official with some paperwork.
An LLC, a partnership, or any other type of business will have corresponding agreements (for example, an LLC requires an operating agreement), and this is the time to seek out an attorney, says Julian Cordero, managing attorney of Cordero Law LLC. Investing about $1,000 to have an agreement properly drafted right away is smarter than saving the money now only to pay it back later in a costly lawsuit, he says.
Not only will these documents protect your business interests, but proper agreements can also “prevent the relationship from being affected in the event of a business disagreement, because you are forced to act along with what the agreement says and not with your emotions,” Cordero says.
When you’re consulting with your lawyer, make sure you address equity and an exit strategy. What will happen if one partner wants to sell the company? Or maybe you'd like to cash out eventually and your partner would not. Interests evolve and business is tough; what happens if one of you decides to work for someone else or if you break up romantically? Your partnership agreement should include conditions on terminating a business relationship to avoid expensive and exhausting litigation.
Each partner should agree to and have a clear understanding of the varying percentages of payment and stock, whether you want to base it on skill level, investment amounts, or split it down the middle. Make sure that’s in your written agreement, too.
Clearly Define Roles
Couples who “sit and discuss what roles everyone will have in the company” have the best chance at success, Cordero says. Creating boundaries of operations between the two of you will reduce disagreements, and putting it on paper will hold the two of you accountable and keep responsibilities clear.
There are no right or wrong answers to how you and your significant other should apply titles and map out a reporting process, Cordero says, and seniority and workflow are completely up to the business partners, based on experience, qualifications, and personal preference. It is, however, necessary to make these decisions before opening shop so that you can stick to them and avoid speed bumps.
However you divvy things up, make sure you both have formal job descriptions, designate who “owns” specific responsibilities, and establish a chain of command.
Plan for Deadlock
One sticking point — even with clearly defined roles — is the issue of stalemate: Unlike in a purely personal relationship, you can't always just agree to disagree. You will need to have a tiebreaker in place when you come to a standstill on a serious business issue, especially if and when it affects employees. Plan a go-to resolution, like agreeing to mediation or arbitration.
If you reach a deadlock trying to figure out ownership or valuation, you can use a forensic accountant or firm to determine valuation when you’re ready to sell. Or you can use the same formula you used at the beginning of the process for determining ownership interests — eliminating the need for a firm altogether.
Prepare for the Unexpected
It’s not pleasant to think about, but accidents happen. If your partner is hurt or passes away unexpectedly, what does this mean for you, their extended family, and the future of the business in terms of debt and inheritance? What is owed and what is protected?
Cordero says that depending on the type of business, “you can set it up so that it continues past owner death, or you can have it set up so that it ends when an owner passes away.” You can also plan for inheritance — and decide who would inherit your partner’s share in the business, whether it’s you or someone else they designate. It’s best to go with an attorney prior to starting your business. Bring it up while you’re crafting your partnership agreements.