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In business with a family member? Get a partnership agreement

On Behalf of | May 5, 2021 | business formation & planning |

Falling out with your business partner can create a world of problems. It is even more so when your partner is also your family member.

When you start a business with a relative, you might think an equal split is fair. It allows you both an equal say in the running of the company. However, 50:50 divisions can create an impasse that you have no way of resolving. Better is to have one partner hold a majority share. That way, when you cannot reach an agreement, they can use their majority to make the call.

An alternative is to have a board of directors who make those vital decisions or a clearly defined process to resolve stuck situations. For instance, you could put into your contract that when a decision is unreachable, your parent who is not involved in the company makes the call.

Always assume a partnership will fail

Business partnerships have a high failure rate. You should always make plans for what happens if things do not work out. When you make your partnership agreement, set out a way to end it. Making this clear at the beginning avoids fighting over it later. Stipulate how you will value the company and whether the other party has the first right of refusal to buy the other person out.

There are several reasons you could need to end the partnership. Not all involve you falling out. One of you could decide they want to spend their time elsewhere. Or one of you could become too ill to continue working. If you do not include a clear exit strategy in your contract, it could result in a dispute that harms the business and your relationship.