You may trust each other completely. But before opening a business together, make sure you agree on money, responsibilities, decisions and what happens if someone wants to leave.
You and your sister have talked about opening a restaurant for years.
She knows the kitchen. You know how to manage customers and keep the books. You’ve found a location, started looking at equipment and can almost picture opening day.
Then comes a question neither of you has discussed.
Who gets paid first if the restaurant starts making money?
She expects a salary because she’ll work there every day. You assumed you’d split whatever the business earns.
Neither expectation is necessarily unreasonable. But the disagreement could create problems long after opening day.
Starting a business with someone you trust can bring shared experience, commitment and support. It can also mean mixing personal relationships with financial decisions.
Before signing a lease or investing your savings, here are five agreements worth making.
1. Who owns what, and what is each person contributing?
Imagine one partner invests $40,000 while the other contributes $10,000 and plans to manage the business full-time.
Should they each own half?
There’s no single answer. But they need to agree.
Write down each person’s ownership percentage and contributions, whether that’s money, equipment, property or work.
Then consider what happens if the business needs another $20,000 six months later.
Will everyone contribute more? Can one partner lend money to the company? Could another investment change ownership percentages?
These questions matter because opening costs aren’t always the biggest financial challenge. Parriva’s guide to calculating how much money you need to start a business explains why owners must also prepare for the months before revenue covers expenses.
Ask each other: What does each person own, and what happens if the business needs more money?
2. Who makes decisions when you disagree?
Two people can share a business idea and still have very different ideas about running it.
One wants to hire another employee. The other wants to save money.
One wants to borrow money to expand. The other thinks it’s too risky.
Decide who handles everyday operations and which decisions require everyone’s approval.
You might allow one partner to manage staffing and suppliers while requiring both owners to approve major loans, new locations or expensive purchases.
Also decide what happens when you cannot agree.
For two equal owners, a disagreement can leave an important decision unresolved.
Ask each other: Who can sign contracts, spend company money or take on debt without the other’s approval?
3. How will everyone get paid?
Ownership and compensation aren’t the same thing.
Suppose two friends each own 50% of a business, but only one works there full-time.
Should that person receive compensation for managing daily operations? When should owners receive money from business profits?
What happens if the business has money in its account but needs it for rent, employees or supplies?
Agree on how working owners will be compensated, when profits may be distributed and how much cash the business should keep for expenses.
California business structures have different tax and compensation rules. An LLC member, general partner and corporate shareholder may not be paid or taxed the same way.
An accountant can help the partners understand those differences.
Ask each other: Are we getting paid for our work, our ownership or both?
4. What happens when someone doesn’t keep their promises?
Your cousin agreed to manage the store five days a week. After several months, they’re showing up only twice.
You’re doing the extra work, but ownership hasn’t changed.
What happens next?
Discuss expectations for working hours, responsibilities, financial reporting and access to business records.
Then decide how you’ll address problems.
Will partners meet to discuss concerns? Is there a process for resolving disagreements? Would mediation help before a dispute reaches court?
A written agreement won’t eliminate every conflict. But it can give everyone a process to follow when emotions are running high.
California law also places limits on what business agreements can change, including certain duties and information rights.
Ask each other: How will we handle missed responsibilities or serious disagreements before resentment takes over?
5. What happens if someone wants to leave?
This may be the hardest conversation, especially when you’re starting with someone you love.
But circumstances change.
A partner may move, become ill, need money or simply decide the business isn’t right for them.
Who can buy their ownership interest? How will you determine its value? Can they sell to someone outside the family? What happens if an owner dies?
California’s rules depend on the business structure. General partnerships, LLCs and corporations don’t all follow the same ownership-transfer and buyout rules.
Don’t assume someone who leaves can automatically recover their original investment, or that remaining owners can simply refuse a buyout.
Ask each other: If one of us leaves, how will we decide what happens to their ownership?
Protect the business and the relationship
Before opening, write down your answers to these five questions.
Then have a California business attorney help turn those decisions into appropriate agreements, with an accountant reviewing financial and tax arrangements.
The documents depend on your business structure. LLCs use operating agreements, general partnerships may use partnership agreements, and corporations have their own governing documents.
California’s Secretary of State explains that operating agreements and corporate bylaws are maintained by the business rather than filed with the state.
If you’re still deciding whether to launch, Parriva’s article on testing a business idea before quitting your job offers another useful perspective on reducing risk before making a major commitment.
You don’t need to expect a friendship or family relationship to fail.
You need to make sure everyone understands the business they’re agreeing to build.
The best time to have a difficult conversation about ownership is before there’s money, debt or a disagreement standing between you.
