Starting a business with friends or relatives often feels natural: people trust one another and share common values and vision. At the outset, everything seems simple—verbal agreements, shared expenses and profits, a 50/50 company registration, and off you go. But when the first challenges arise, the lack of a proper legal framework begins to work against the business. In the worst cases, this leads to litigation, operational paralysis, or the loss of the business altogether.
Key issues of informal partnerships
The most common mistakes we see in practice include:
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Funds invested in the business without proper documentation—no contracts, no records, only verbal agreements.
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Ownership interests in the share capital formally split “50/50,” without regulating corporate relations.
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No defined decision-making procedure, which leads to deadlock in the event of conflict.
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No agreed exit mechanism or buyout terms.
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Inheritance, non-compete, and crisis-management issues left unaddressed.
All of this unfolds against a backdrop of good intentions and friendship—which, unfortunately, does not always withstand the pressures of money and responsibility. These risks can be avoided or at least minimized by following one of the approaches below.
A corporate agreement as the foundation of mature business relations
Modern legislation allows for flexible regulation of partnerships through a corporate agreement.
This legal instrument enables partners to:
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Define the company’s governance model. For example, which decisions require unanimity and which can be made by a qualified majority.
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Set the strategy and approval procedure for the company’s business plan and any amendments. This helps prevent future disputes over expectations regarding the nature of the business, timelines for milestones, or profitability assumptions made at the time of investment (whether cash, assets, or intellectual property).
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Allocate functional roles among partners. One partner may oversee finance, another operations, and so on.
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Provide for mandatory sale scenarios. For instance, if a partner breaches the agreement, fails to contribute financing, engages in competitive activities, or does not perform assigned duties.
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Regulate inheritance matters. For example, establishing voting procedures for a share until heirs formally assume their rights, to avoid blocking company operations.
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Introduce non-compete restrictions. Such as prohibiting partners from launching similar businesses in a specified region for a defined period.
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Set rules for gifting shares. For example, limiting potential recipients to close relatives of the ultimate beneficial owner.
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Use an irrevocable power of attorney. This allows one partner to make critical decisions if the other evades management responsibilities or if grounds for mandatory share sale arise—particularly useful in conflict situations.
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Determine dividend distribution rules. This section can set performance thresholds for dividend payments or define a period during which all profits are reinvested into the company’s growth.
What if you still prefer to keep it “friendly”?
Sometimes parties are not ready to formalize a corporate agreement or even establish a legal structure right away. In such cases, risks should at least be reduced through basic instruments:
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A loan agreement, where one partner provides financing to another for launching or developing the business. The transfer of funds must be documented, as this is the first thing courts examine in disputes.
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Securing the loan with a mortgage or pledge, enabling recovery of the investment in case of disagreements. Collateral may include company assets (real estate, equipment, inventory) or personal assets of individual guarantors.
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A joint activity agreement, which formalizes mutual expectations and responsibilities.
A successful business is built not only on trust, but also on clear rules of engagement. Properly documented agreements are not about distrust—they are about responsibility and long-term stability.
If you are doing business with people close to you and have not yet addressed the key issues, do it now. It is far better to agree while still on shore than to sort things out in the middle of a storm.
