Avoiding Business Disputes: Should You Partner With Family Or Friends?

It is natural to partner up with friends and family for a business venture.  These are the people with which you most often socialize and share ideas.  Also, these are the people you trust.  Going into business with family and/or friends is perfectly okay--as long as you remember it is "business."

For those of you who know me, you know I have gone into business with family and friends in the past and I can venture to guess that I will do it again.  Fortunately for me personally, I have had only positive experiences.  However, I have had the unfortunate luck as an attorney of watching best friends transform into bitter enemies and family members damaging relationships, leading to irreparable conflict.  What is the most common cause?  Treating the business venture as anything other than what it should be--a business venture.  Friends and family members in business together tend to take a relaxed and informal approach to the very issues in business that require formality and structure.  Such a "friendly" approach is often the factor leading to the ruination of the business and the pre-existing relationships between partners.  Friends and family members engage in a sense of false comfort, lulling themselves into believing no issues will arise that they cannot deal with "as friends."

Business structure formalities are essential to effectively govern critical issues in business.  When conflicts (or mere questions) arise, both parties need to be able to revert back to the governing document or set of documents that are in place to govern.  Such direction takes the emotion out of the issue.

These governing documents are typically the shareholder agreements and bylaws for corporations and the membership agreements and operating agreement for limited liability companies (LLC's).  These documents will be the controlling documents on important issues such as control, owner disputes, sale or liquidation of an owner's interest, what to do in the event of a deadlock, what happens if one partner dies, becomes incapacitated or wants to move to the Galapagos Islands, and any number of other issues that may arise.

Of crucial importance is the formal agreement as to how conflicts between owners will be handled.  Many times, a dispute resolution clause will be included in the governing documents calling for: 1) one side giving the other side written notice of a disputed issue; 2) if the conflict cannot be worked out between the parties, non-binding mediation will be held; 3) if unsuccessful, arbitration will occur.  This is an over-simplified example, but surprisingly friends and family choose not to lay this type of framework, again due to that false sense of comfort.  I have been told by clients that it "would have been awkward to bring up" or "we have been friends for decades, we know how to solve our disagreements."

Business disputes are never pretty, but they are particularly messy when between family or friends.  Take a business-like approach, because let's remember--this is business.

For more information regarding business formation or if you are involved in a business dispute in San Diego, please contact Richardson "Red" Griswold of Griswold Law.

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