Congratulations! You have a great business idea, you have written a solid business plan, and you are ready to start a new business with friends or family members. Is it ok to start a business with close friends and family? Sure! However, even well-known family businesses like Disney and Ringling Brothers and Barnum & Bailey Circus had and are experiencing horrific family feuds over things like dissolution, shareholder distributions, board of director positions, etc. It is very important not cut corners, and have the proper business agreements in place to protect yourself, the business, and family relationships as best as possible. It is very important to follow these steps.
1. Consult with an Attorney
Speak with a business attorney to determine which entity is best for your new business at the time. Recently, I had a client, who did not think he needed a lawyer to help his family set up their corporate structure. He advised his family that he knew all about business entities. He kept advising the other family members that a S-Class was the best type of business entity for the new family business. He kept repeating the word S-Class, I finally had to stop him and explain to him, that a S-Class is a type of car and not a business entity.
It is important to determine which form of ownership is best for the new business. Examining the pros and cons of a partnership, Limited Liability company(LLC), Corporation, S-Corp, non-profit or a cooperative is important. After you determine which entity is best for your family business, then have it registered with your state government, and apply and obtain a Federal Employee Identification Number (EIN). After you have an EIN, your business will be able to open a bank account. Make sure agreements are written before money enters the bank account.
2. Agreements Must Be Established
Before your business starts operations, it is important to establish, an operating agreement, or partnership agreement, or bylaws depending on the type of entity you establish. It is so important and strongly recommended to get these agreements established early. These agreements can help avoid unnecessary disputes and heartache in the future.
One example of why the agreement is critical, is if in the future things don’t work out for the business it is important to know what dissolution could look like in various scenarios. If one person decides they want to dissolve their portion of the business, or if one of the owners or shareholders of the business dies, all parties will understand how assets will be distributed. Other important factors to discuss when forming a new corporation are: What percentage of shares does each person have? Who is the majority shareholder of the business? Will there be equity partners? Who has voting rights? Should there be two signatures to withdraw a certain amount of money out of the business account? Can other people buy- into the business at a later time? Will the business be seeking funding? There is so much to discuss, so it is important to work with a competent attorney so you can have agreements in place to protect you and the business in the future.
If the business decides to hire employees, make sure the business speaks with a business attorney to ensure employment procedures and employment manuals are above board. It would be unfortunate if a business owner thinks their close friend and business partner is keeping up to date with all the business taxes, then suddenly a letter from the IRS arrives indicating that taxes are owed for back employee taxes. The business should decide if they will use QuickBooks, a bookkeeper, or a payroll company to handle these important employer practices. It is important to understand discrimination practices, to avoid unnecessary discrimination issues in the future.
Let’s face it running a business with someone you trust is great, but there is so much at stake and a lot to consider. It is important to keep the levels of communication open, set realistic expectations of everyone’s roles, and seek legal counsel to avoid unnecessary pitfalls. If disagreements arise, or circumstances change at least there will be agreements in place to help the business navigate through the dispute.
Good Luck and Congratulations on your journey as a business owner.
Gwen-Marie Davis, Esq. is the managing partner at GDH Law. GDH Law has its main office in Lanham, Maryland which is located in Prince George’s County, MD. They also have an office in Montgomery County, Maryland. GDH Law’s practice areas include business law, civil litigation, and personal injury.