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6 Tips for Building a Business with Your Sister or Best Friend

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6 Tips for Building a Business with Your Sister or Best Friend

Starting a business with your sister – or a best friend who is like one – can seem like the perfect arrangement. Who else knows you better and wants to see you succeed more? Who else can be so brutally honest (admit it, she was right about that perm, those skinny jeans and that guy your senior year) or unwaveringly supportive? Who else will have your back – and your bottom line?

RELATED: Ask Avvo: Can I start a small business without an LLC? 

But while some friend/family partnerships thrive (look at the successful fashion empire Mary-Kate and Ashley Olsen have forged or the wildly popular skin-care line Proactiv started by dermatology classmates Katie Rodan and Kathy Fields), doing business with those closest to you can be dicey. According to the Family Business Institute, only about 30 percent of family businesses survive to the second generation. And it’s not hard to see why. The very things that make a friend/family partnership so appealing – a shared history and tight bond – can actually be its downfall. It’s tempting, for example, to fall into familiar family roles (i.e., bossy big sister, compliant little one) instead of establishing roles based on each other’s strengths and weaknesses. How do you end up on the profitable side of a friend/family business? Here are six tips:

  1. Hammer out essential issues before you start the business. You may know each other inside and out, but a business partnership is likely new territory for you. Open, honest and frequent discussion about how the business should be owned and operated is vital. Some things to address: What is each owner’s initial capital investment? How will interest in the company be split – for example, 51 percent for you, 49 percent for her? If one person wants out, what will be the buyout plan? Will you draw a salary and how much will you each be paid? An attorney specializing in business law can help you discern important issues and write up contracts
  2. Get everything in writing in the form of a contract. Sure, one of the reasons you’re going into business with her is because you trust her not to stab you in the back, but getting written and signed documents spelling out some of the things discussed above can ensure you are both on the same page about key issues. It also gives you something to refer back to when you’re in a disagreement.
  3. Do your legal research. For example, make sure the trade name you choose hasn’t already been taken, that you comply with federal and state securities laws and that you have all the necessary licenses and permits to operate. Again, this is where an attorney specializing in business issues can help you. The last thing you want is for your fledging business to be hit with penalties.
  4. Know each other’s strengths. Your sister is a control freak? Then it makes perfect sense for her to be in charge of quality assurance. You’re more a creative, visionary type? Maybe you should handle design and development. Your best friend can’t balance her checkbook? Obviously she’s not the one you want handling your finances.
  5. Establish a chain of command. Who reports to whom? For instance, will you supervise XYZ employees while she oversees ABC ones? To whom will you report? What about her? Where does the buck stop?
  6. Create a system of checks and balances. Hey, even the president has Congress looking over him. Consider setting up a board of directors – even if just an informal one consisting of, say, your attorney, accountant, financial advisor and mentors. To help prevent any possible financial wrongdoing, consider having two people sign checks and/or having an outside person oversee the books.
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Kabbage Team

The Kabbage Team is here to not only fund the small business loans you need, but to help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.

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