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  • Bilanz Capital

Starting a Business with a Friend or Relative: Key Considerations

Starting a business with a friend or relative may seem like a great idea in the beginning, but as the company grows or fails after investing significant time and money, it can lead to unnecessary complications and tension. Therefore, it is important to consider the following key points when starting a business with a friend or relative:

1. Clearly define the roles and responsibilities of each partner in the business, including who will be responsible for what tasks and how decisions will be made.

2. Clarify how much each partner will invest in the business and what instrument will be used for the investment.

3. Define what will happen if one partner decides to leave the company and what will happen to their shares.

4. Define what will happen if one partner fails to fulfill their financial or operational commitments.

5. Determine whether each partner will be an active or silent partner and if they are active, what role they will play in the business.

6. Determine what will happen if the board seats are divided equally and remedy to hung assembly in the case of Pvt. Ltd.

7. Decide how profit will be distributed. Also if the active partners are drawing salaries then will it be adjusted with the profit distributed?

8. Define exit strategies: It's important to consider what will happen if one partner wants to leave the company or if the company fails. Agreeing on exit strategies upfront can help to avoid disputes down the road.

9. Set up an agreement: It is important to put all agreements in writing. This can help to prevent misunderstandings and disputes down the road. A legal agreement should outline the roles and responsibilities of each partner, the investment structure, the distribution of profits and losses, and the exit strategies.

By considering these points and addressing them upfront, friends can avoid misunderstandings and disputes that can arise when starting a business together. It is important to have these conversations early on to ensure that everyone is on the same page and that the business has the best possible chance of success.



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