BUSINESS FORMATION 2
Business Formation
Working with others can be beneficial as Proverbs 27:17 says, “As iron sharpens iron, so
one person sharpens another” (New International Version, 1973/2011). Ecclesiastes reminds us
that two people have a better return on labor than one person only. They can help lift one another
and overcome challenges with one another. Furthermore, a team cannot be easily separated (New
International Version, 1973/2011, Ecclesiastes 4:9-12). These verses support the principle of not
being bound together with unbelievers (New American Standard Bible, 1960/2000, 2 Corinthians
6:14). Paul is speaking specifically about being bound together with believers in Jesus Christ.
Believers in Christ and unbelievers should not partner with one another as their foundational
beliefs will not align. The same can be said with any business partnership. If business partners do
not have the same goals and aspirations, they should not partner. Otherwise, the business will
eventually fail.
As friends move into starting a business together, they must consider the cost, not just the
financial cost, but the physical, mental, and emotional cost. Starting a business with friends will
require “honesty, objectivity, and clearly defined boundaries” (In Business with Friends, 2019).
It is important to collaborate with friends early and have a deep conversation concerning mutual
trust, shared vision, compatibility, strengths, and weaknesses, along with financial arrangements
and defining roles (In Business with Friends, 2019). It would be a wise choice to seek trusted
advice or business counseling before committing to a business partnership. Seeking professional
help such as a management coach can pay huge dividends for friends going into business
together (Greenfield & Levy, 2019). The founders of ‘Of A Kind’ discuss the importance of
having transparency in the business relationship. It is not something that happens instantly but
BUSINESS FORMATION 3
gradually over time. Partners must communicate and collaborate well with one another. It helps
when everyone has the same compassion and desire to succeed (Greenfield & Levy, 2019).
Before Adam, Betty, Camala, and Duane decided to go into business with one another
and money exchanged hands, the four friends should have sought professional advice and created
a full business plan with an operating agreement. Although an operating agreement is not
required for limited liability companies (LLC), it is highly recommended that an agreement is
put in place in writing (Kubasek et al., 2023). The operating agreement should cover how the
company will be managed, sharing of income and losses, transfer of interest, and dissolution
matters (Kubasek et al., 2023). As each friend discussed these various matters about the
operating agreement, questions and concerns would have come to the surface. Adam and Betty
could have articulated how committed they would be, and Camala and Duane could have
expressed their concerns and aspirations.
In their discussion, the friends could have decided whether LLC would be member-
managed or manager-managed (Kubasek et al., 2023). The member-managed LLC has all
partners participating in the management of the business and routine activities decided by a
majority vote. A unanimous decision must be made for any non-routine activities such as selling,
leasing, exchanging, or disposing of the company’s property; mergers; or amending the operating
agreement (Kubasek et al., 2023). In a manager-managed LLC, the partners decide who will
manage the company. The manager(s) can be one or more of the original partners or someone
outside the LLC partnership. Knowing this information before money exchanged hands among
the four friends could have avoided some hardship. They may have decided to start with a
member-managed LLC. Once things started to take off, they could have all agreed to amend the
operating agreement to have a manager-managed LLC with Adam and Betty as the managers.
BUSINESS FORMATION 4
In the operating agreement, the partners must decide the amount of pay each partner
should receive. When deciding the amount of pay, the partners “should consider the
opportunities for other investments, the risk associated with the LLC's operations, and the
likelihood capital will be tied up for an extended period” (Owen, 2020, p. 1). In addition to
compensation for each partner, the operating agreement should address the allocation of income
and losses. Most state laws require apportionment of income and losses based on the company’s
capital gain or loss (Owen, 2020). The operating agreement can be more specific and address the
various types of cash flow that are tailored to the company. Other considerations to address in
the agreement should include “cancellation-of-indebtedness income, capital gain or loss, and
alternative minimum tax adjustments and preferences” (Owen, 2020, p. 3).
Besides creating an LLC, the four friends could have chosen to create a limited
partnership. This is where there is an agreement between at least one general partner and one
limited partner. The general partner(s) shoulder the management responsibilities and share
unlimited personal liability for any debts, while the limited partner(s) undertake no liability other
than the capital they invested (Kubasek et al., 2023). In the case of our four friends, Adam and
Betty could have been the general partners whereas Camala and Duane could have been the
limited partners.
In conclusion, the four friends made the right decision to create a LLC, however, they
should have created an operating agreement as well. More specifically, they should have decided
to create a manager-managed LLC with Adam and Betty managing the company. Camala and
Duane could still receive interest based on their initial start-up capital per the operating
agreement they put in place.
BUSINESS FORMATION 5
References
Greenfield, R., & Levy, F. (2019). The secret to successfully mixing business with friendship.
Bloomberg.Com, N.PAG. https://search.ebscohost.com/login.aspx?
direct=true&db=bth&AN=140627668&site=ehost-
live&scope=site&custid=liberty&authtype=ip,shib
In business with friends: A mistake? (2019).JLeadership Briefings, 34, 6.
https://search.ebscohost.com/login.aspx?
direct=true&db=bth&AN=136372040&site=ehost-
live&scope=site&custid=liberty&authtype=ip,shib
Kubasek, N. K., Browne, M. N., Barkacs, L., Herron, D., & Dhooge, L. (2023).JBiblical
worldview edition of dynamic business law"(3rd ed.). N. J. Kippenhan (Ed.). McGraw
Hill Education.
New American Standard Bible. (2000). Zondervan. (Original work published 1960)
New International Version. (2011). Zondervan. (Original work published 1973)
Owen, S. (2020). Economic issues when forming an LLC. Tax Adviser, 1–6.
https://search.ebscohost.com/login.aspx?
direct=true&db=bth&AN=146235197&site=ehost-
live&scope=site&custid=liberty&authtype=ip,shib
Powered by TCPDF (www.tcpdf.org)
