Why You Need an Operating Agreement When Going Into Business With Friends or Family

It may feel strange, but you need more than a handshake if you're starting a business with people you already trust — friends, siblings, spouses, or longtime partners. Unfortunately, emotions and money can cause hard feelings among the closest of friends. That’s why having an operating agreement and other written business contracts is absolutely essential — even when you’re going into business with someone you love. It actually is a way to show your love!

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Whether you're forming an LLC or a partnership, formal agreements help you protect both your business and your personal relationships. They create clear boundaries, reduce misunderstandings, and set expectations that everyone agrees to from the start.

Written Agreements Are Crucial in Family or Friend-Based Businesses

1. Clarify Roles and Expectations Early

In the early stages of a new venture, everyone is excited — and likely wearing many hats. But as time passes, roles may shift, expectations may diverge, and stress can build. An operating agreement forces everyone to have honest conversations upfront about:

• Who’s responsible for what
• Who gets to make which decisions
• How time and money will be invested
• What happens if someone wants out

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It is worth your time and money to invest in these hard conversations early and often. If conflict arises during these discussions, it can be resolved or act as a red flag and good reason to pause before proceeding with the plans.

2. Prevent Misunderstandings and Disputes

It’s easy to assume your sibling or cousin knows you want 50% of the business — but unless it’s in writing, they may see things differently. Even close relationships can unravel if there's no clear understanding of ownership percentages, voting rights, or profit-sharing.

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Operating agreements spell out the answers to the “what ifs”:

• What if one of you wants to leave?
• What if the business takes on debt?
• What if someone passes away?

3. Protect the Business Legally

Operating agreements are especially important for LLCs, as they:

• Establish the business as a separate legal entity
• Help preserve limited liability protections
• Reduce the risk of default state laws determining how your business is run

If your business ever faces legal issues or tax scrutiny, having these documents in place strengthens your legitimacy and compliance.

4. Safeguard Personal Relationships

Let’s face it: the risk isn’t just financial — it’s emotional. Business disagreements with family or friends can quickly and easily spill into your personal life. Written agreements take the pressure off the relationship by letting the contract — not personal assumptions — govern business decisions.

Don’t Skip Agreements With Friends or Family

Here are some real risks that can occur if you move forward without proper documentation:

• Unequal work, unequal pay: One partner may feel they’re contributing more than another.
• Unclear decision-making: Without a clear structure, decisions can be delayed or turn into power struggles.
• Disagreements over money: From how profits are distributed to how much each person should invest — money misunderstandings can get ugly.
• Legal liability: If things go wrong, and there’s no written agreement, courts will rely on state laws — which might not reflect your intentions.
• Destroyed relationships: Many personal bonds don’t survive the fallout of a failed business.

What to Include in Your Operating Agreement

Here are the key things your operating agreement should cover:

1. Ownership percentages — Who owns what share of the company?
2. Roles and responsibilities — Who is doing what? Are some partners silent investors?
3. Capital contributions — How much money or assets is each person contributing?
4. Decision-making process — Will you vote on big issues? Who breaks a tie?
5. Profit and loss distribution — Will profits be shared equally or based on ownership?
6. Exit strategy — What happens if someone wants to sell, leave, or passes away?
7. Dispute resolution — Mediation? Arbitration? Litigation? Lay out the path now.

“The Talk” With Friends or Family

Having “the talk” about formal agreements might feel awkward. However, the best approach is to treat your business like a business — and not just a passion project between pals.

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Here’s how to keep it respectful:

• Say: “Let’s protect what we’re building together — and our friendship.”
• Frame it as planning ahead, not anticipating conflict.
• Use a third party, like an attorney or business advisor, to help facilitate.
• Get everything in writing — and have all parties sign.

Call in the Pros: Legal Help Is Worth It

You get what you pay for. Sure, you can use a free online template. However, it’s wise to have a business attorney review and customize your agreements to accurately reflect the arrangements and responsibilities among business partners. They’ll make sure it complies with your state’s laws and protects your long-term interests. You may also need other contracts, like:

• Buy-sell agreements
• Confidentiality agreements
• Employment or contractor agreements

The upfront cost of legal help is small compared to the time, money, and relationships it can save down the road.

Final Thoughts: Protect the Business, Protect the Relationship

Operating a business with family or friends can be incredibly rewarding — or incredibly risky. The difference often lies in preparation. A clear, well-drafted operating agreement sets expectations, defines boundaries, and reduces stress down the line.

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If you're launching a business with someone you care about, don't skip the paperwork. Your future self — and your relationship — will thank you.

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Need help drafting an operating agreement or reviewing your business contracts? Reach out to our team — we’re here to help you start strong and stay protected.

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‍Disclaimer: The information provided on this blog is for general informational purposes only and does not constitute legal advice. The content may not reflect the most current legal developments.