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What to consider before you go into business with a friend

Before you go hunting for an office or get the business cards printed, it’s crucial to consider all aspects of a joint enterprise.

In the new, gig economy, it can be tempting to go into business with a friend to take advantage of changing work opportunities. However, although a growing number of jobs now fall outside the structure of formal employment, the risk of a business ruining a friendship or vice versa is as real as ever.

According to Harvard Business School professor, Noel Wasserman, author of The Founder’s Dilemma: Anticipating and Avoiding Pitfalls That Can Sink a Start-Up, the least stable founding teams are friends.1

On the flip side, Wasserman also found that former colleagues have a higher chance of succeeding in a business together.

 

You don’t go into business with someone who’s like you, or one of you is redundant.

Choose your partner wisely


Global thought leader in commercial creativity Kieran Flanagan and behavioural strategy expert Dan Gregory have been in business together for 25 years and knew each other previously through the advertising industry. Most recently they collaborated on a new book, Forever Skills.


“We’ve seen each other ugly, cranky and under pressure,” says Flanagan. “Dan knows I am incredibly disorganised, and he’s like Switzerland. But what we’ve realised over time is instead of being frustrated by each other’s differences we need to understand them.”


Gregory agrees acceptance is key. He also believes, “You don’t go into business with someone who’s like you, or one of you is redundant.”


That said, you need common core values and goals, and you need to keep those front-of-mind when business gets tough, including when issues come up for your business partner.


“Don’t expect that you will always invest equal amounts of time and energy in the business. Sometimes one of you just isn’t ‘on’ or life is distracting. A lot of great partnerships break down because of resentments,” says Gregory.

 

Consult a good lawyer


Despite their long friendship, Gregory and Flanagan didn’t skip any of the paperwork their lawyer advised. And that’s just as well. According to Barry van Heerden, Property and Commercial Law Partner at Attwood Marshall Lawyers, “Our commercial litigators are flat-out busy with businesses that broke up but have no agreements in place to finalise the relationship and resolve any disputes.”


Van Heerden says the initial, legal decision for any joint enterprise is what type of entity they conduct business within.


“We advise against a partnership because you are both personally liable for any debts that are incurred, including any claims against the business that your insurer does not pay,” he says. “The end result may be that whatever you have in your personal names – for example, your house – can be exposed.”


Preferable choices are a company or a trust, says van Heerden.


“As a company, you would be two shareholders conducting business. You enter into a Shareholder’s Agreement, you have a company bank account, money earned belongs to the company and, generally, any claim is against the company.”


The agreement spells out job responsibilities, what happens if one partner wants to sell, how disputes will be resolved and other thorny issues, including budgets and funding.


“Even though there is no legal requirement for it, we believe it is a cornerstone of a potentially successful business.”


A trust is another good choice for personal asset protection which you can discuss with your lawyer, says van Heerden.

 

 

Former colleagues have a higher chance of succeeding in a business together.

Deal with death and taxes


Before you set up a business, you need to understand your obligations when it comes to tax and superannuation, and registering for an Australian Business Number and name, says the ATO.


In a company, you are paid by the company or take a director’s fee and are taxed at the company rate.2


In a trust agreement, beneficiaries include their share of the trust's net income as income in their own tax returns and may distribute this income to beneficiaries in lower tax brackets.3


It’s imperative to seek out a good financial adviser.


You’ll also need business insurance. Van Heerden recommends a Business Succession Plan. “If one of you dies or is permanently disabled, this agreement provides an option for the remaining partner to buy the other partner’s share in the business and dictates, among other things, for example, how the purchase price is determined and how it is paid.”

 

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (Colonial First State) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. Colonial First State also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from colonialfirststate.com.au or by calling us on 13 13 36.