Ready, Set, Stop!

It's exciting to start a new business. The idea seems like it can't fail. You and your future co-owners are BFFs, and everyone is chomping at the bit to get started.  

This is human nature and it's completely understandable.  

If you are going to form a company with a parter or two, you are going to need contracts that define the terms and conditions of the business relationship, not the least of which is ownership, profit sharing, salaries, what happens if someone leaves unexpectedly, or if one of you elects to no longer be a part of the business.  

If you do not have these agreements in place, state statutes define the "default rules" that will apply, and most people do not want these "default rules" to apply to their partnerships. For example, the default rule in many states require co-owners to divide up LLC profits and losses equally, regardless of each member's investment in the business. If you and your co-owners did not invest equal amounts in the LLC, you probably don't want to allocate profits equally.  

As a Bellevue business attorney, I've seen a number of business launches crash and burn shortly after the entity is formed because co-owners have a falling out.  This happens all the time, and it's always a big surprise when this happens. After all, the co-founders were BFFs just a few weeks ago.     

So, with this risk in mind, here's a tip that is best to not avoid.  Do not form the company entity with the Secretary of State until after these "co-owner contracts" are in place and fully executed.  This will allow you and your co-owners to avoid the "default rules" in case there is an early falling out. Further, the process of negotiating and working on these agreements may help you and your future business partners get an accurate picture of how everyone works, cooperates, and compromises (or does not work, cooperate or compromise).  Getting this picture early is a very good thing indeed.  

If the BFF friendship has to go, it's better for it to go before you are formally business partners, and you automatically become formal business partners when you file with the Secretary of State and list everyone as co-owners.  Stop and take the necessary time and to get your "co-owner contracts" in place before you file and register the entity with the Secretary of State. 

Mark D. Walters