Before starting a business with a friend talk about control and exit

Starting a business with someone you trust can make the first decisions feel easy. I would use that trust to have the difficult conversations early. Discuss how each owner will contribute, who can make decisions and what happens if the relationship or the business changes.

My background includes advising businesses on formation and transactions, along with work in business operations. From that perspective, choosing an entity is one part of the planning. The owners also need a shared understanding of how they intend to work together.

Begin with contributions. One person may provide cash while another supplies most of the labor. A third may bring equipment, customer relationships or an existing product. Write down what each person is promising and whether the contribution has already been made. Then separate the questions about ownership, compensation for work and repayment of money. Treating all three as the same conversation can conceal a disagreement.

Next, talk about control. Who can sign a lease, hire an employee or commit the company to a substantial purchase? Which decisions deserve a conversation among all owners? What happens when two equal owners disagree? A statement that everyone will be reasonable does not tell the company how to act when a decision cannot wait.

An operating agreement is one tool for recording an LLC's internal arrangements. The Small Business Administration's general explanation describes financial and operational subjects such as ownership, voting, management and buyout provisions. [1] The legal effect of a particular arrangement depends on the governing law and the documents; this article does not prescribe a Tennessee operating agreement.

The exit conversation deserves the same attention as the launch. Consider a hypothetical owner who needs to reduce involvement because of illness, family responsibilities or another opportunity. Is that person expected to sell an interest, remain an owner or stop receiving compensation for work? How would the parties determine a price or arrange payment? These are planning questions to discuss with legal and tax advisers, rather than terms to borrow from an unrelated business.

Also consider what the business must preserve if an owner leaves: access to records, control of company accounts, customer continuity and the ability to keep operating. The paperwork should be considered alongside the practical handoff. Do not share passwords or sensitive account details through an unsecured inquiry form.

For an initial discussion, prepare a plain-language summary of the proposed owners, their contributions, the business activity and the decisions that concern you. Bring existing governing documents if the business already exists. I would rather start with those real choices than a template filled in before the owners have decided what they mean.