Joanna Kong is a business attorney at Vero Law Group who specializes in counseling business owners from initial formation through the various stages of corporate growth, including exits. Prior to joining Vero Law Group, Joanna was a corporate associate at the international law firm Akin Gump Strauss Hauer & Feld, where she represented large, multinational corporations in their business transactions. At Vero Law Group, Joanna works to make major contributions to her clients’ growth, as they rely on her not only for her legal advice but also as a trusted advisor for their businesses.
I asked Joanna a series of questions on starting a business generally, and then specifically, partnering with a friend. The first installment appears here: Starting a Business with Joanna Kong. Below is a discussion of partnering with a friend.
Partnering with a Friend – Dos and Don’ts
- Many young professional women consider collaborating with friends to start a business when they share similar goals. In your practice, what do you recognize as the pros and cons of starting a business with a friend (or friends) and why?
Building a successful business with your friends is the dream – you get to spend time with the people you love and share in your passions together! Another benefit of working with friends is that you are used to communicating openly and freely already and have already built up trust in the relationship.
The biggest problem I see with friends, family members or couples going into business together is that it might become difficult to separate work from personal life, which can cause a huge strain on the personal relationship when every conversation or interaction becomes about work. If you are going into business with a friend, I would recommend setting boundaries for keeping work within the office and making an effort to do fun activities together where the focus is solely on your personal relationship.
- What are common legal mistakes you see between business owners who were first friends, and how are those different from the common legal mistakes of those who came together to form a business in a solely professional capacity?
Because there is a pre-existing relationship and built up trust already, sometimes business owners who were friends first can overlook the importance of having a partnership agreement in place. I have had many clients come to us who started a business with a group of friends but now one of the friends is not pulling their weight and they need to extricate the person. This can be a very difficult task – both legally and on the friendship – without partnership agreement in place. This is further complicated if the departing partner has intellectual property or other company items in their name or control that they refuse to turn over. Without a legal entity or partnership documents in place, it is difficult determine legal ownership and if the partners cannot come to an agreement, the company may have to close down and start over or the departing partner could try to continue the company by him or herself.
- What considerations do you think women should think about before partnering with a friend in a new endeavor?
Going into business together is similar to marriage – you will need to manage finances together, work towards mutual goals and practice compromise and conflict resolution. I have many friends that I cherish and love being around, but the list grows much smaller for people that I could see myself partnering with. The key is for you and your potential partner to be honest with one another about each person’s contributions and shortcomings. My advice would be to think through the following questions with your partner:
(1) What is your vision for the company and how do you envision getting there? If you are a new mom who wants to build a lifestyle business so you can spend more time with your children, it wouldn’t make sense to start a company with your friend that wants to rapidly grow and sell the business in three years. Even if both you and your partner have a shared passion, the type of business each person is trying to build and the day-to-day work that is required to achieve that goal will be drastically different if you’re not on the same page regarding the company vision.
(2) What is your working style and vision for company culture? Does one person want to hire specialists and service providers to help grow the business while the other prefers to bootstrap and figure things out on their own? You’ll also want to think about the company’s core values that will be conveyed to both your clients and employees.
(3) What are each partner’s expectations regarding salary, division of profits, capital contributions or other financial issues? This should be thoroughly discussed and properly documented, as it may likely be the largest source of future contention. I recommend working with both a CPA and attorney so that each partner can know the legal and tax ramifications of these decisions.
(4) Are there any personal issues or financial issues that may affect us partnering in a business together? Are you or your business partner going through a divorce or having health issues? It’s important for each partner to disclose all competing obligations that may affect their performance and time commitment to the business.
PLEASE NOTE: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Pinot Epiphanies, Joanna Kong, or Vero Law Group, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.