Should You Use a Contract to do Business with Family or Friends?

Venturing into business with family or friends might seem like a really great idea at first. After all, friends and family members share a bond with a sense of mutual trust, right?

Wrong. Running a business with family or close friends can prove to be a huge strain on your relationship. Luckily, you can avoid jeopardizing that connection with family members or friends by drafting a contract that outlines each party's responsibilities, rights, and expectations.

What are the dangers of doing business with family or friends without a contract?

Blood stops being thicker than water the moment you go into business with family or friends without a binding contract. What can start as a mutually beneficial plan ends with your high hopes crashing down. Despite everyone's best intentions, it can turn the project into a complete nightmare.

A contract should define each person's role in the business, their position in the company's structure, and how profits or losses will be shared. Doing deals with family or friends could include any buying, selling, or trading, but it comes with its own challenges and risks.

Here are some of the common pitfalls you might face when you're working with family members or friends without a contract.

Losing Stakeholder Capital

The most expensive debt is the one you take on from family members or friends. Whether dramatically or subtly, losing someone's money could ultimately cost you a good relationship. When you accept investments from friends or family, they're probably not contributing resources they're prepared to lose.

If your business deal stops being profitable, there's a good chance you'll see a sudden change in the way they act around you.

Deals Gone South

No matter how close you might be to your pals, unfair deals can create hard feelings. Without a defining contract, it's difficult to see where the boundaries are. And without firm agreements, the other party might not completely understand their responsibilities or how things are divided.

Confusion and frustration can cause the other party to walk away, leaving you stuck with potential expenses or financial obligations.

Mixing Business and Pleasure

When business problems come home with you to your next family dinner, tensions or work politics can sour a great evening.

It's common to have your social life and business overlap, so discomfort is inevitable if you do business with family or friends without drawing up a contract. Business disagreements can turn fun social gatherings into full-blown Hatfield Vs. McCoy scenarios.

A quality contract can draw clear lines, making it easier to leave work frustrations at the office where they belong.

Tips for Documenting Business with Family or Friends

To avoid any misunderstandings, you'll want to issue a contract to any shareholders in your business, even if they're friends or family. Suddenly handing out formal paperwork to people you've always agreed with or gotten along with can feel tactless, but it beats the alternative. Not to mention, they'll probably feel more confident knowing that their interests are protected as well.

1. Know Before You Sign

You should start by becoming well-versed with the contract you've drawn up, either by yourself or with legal counsel. Your friends or family members are going to ask questions, and any confusion on your part will only make them uneasy.

2. Be Present

It's also better to have your family or friend physically present when signing the contract, instead of just sending or emailing it to them. That way, you can discuss any important points together.

3. Prioritize Contracts

Remember that a contract shouldn't come as an afterthought or the last thing on the agenda. Drawing up, notarizing, or signing a contract, like a shareholders agreement, should be the first thing you do when starting a new venture. But even if you've been in business together for a while, a contract can still map out all your shared responsibilities moving forward.

What do you need in a contract between family and friends?

For most basic business deals or projects, a standard contract should work just fine. Your contract should include elements like these:

• Plans for a typical workday
• Clearly allocated responsibilities
• Contributions
• Earnings.

After creating a contract draft, you'll want to have it formally certified by a notary, and you might even want to run it past an attorney who specializes in business contracts. If a solicitor finds potential problems in your notarized contract, they can suggest changes before you sign and move forward.

If you're going into business together with a more in-depth project, you might need a shareholder's agreement. Aside from detailing responsibilities and liabilities, here are a few of the details a shareholder's agreement might include:

• Management structure
• Dividend procedures
• Share transfer
• Policies
• Exit strategies.

Putting a contract in place minimizes risk and gives your business sound legal footing at the onset of your business, ensuring all players are on the same page. Not only will this minimize future disputes, but you can efficiently manage everyday crises while steering your new venture to profitability.

Sorting out Disagreements with a Contract

It's much easier to refer back to a pre-agreed contract when you're negotiating than to get into a shouting match with your relative -- one that's bound to get personal. Your contract should stipulate solutions to scenarios that are likely to pop up in your industry. The contract should also outline a plan for if one business partner files for bankruptcy or passes away.

In reality, the question shouldn't be "should we use a contract," it's where to put everyone's signatures. A contract tailored to your project or venture can safeguard your fledgling business while keeping relationships intact.