Business Formation Analysis: Night Market Startup 2
Introduction
Many people assume that starting a business with someone they already know, trust, and have
common interests with would be a perfect fit. Everything seems easy because of the friendship
and common goal. However, with Adam, Betty, Camala, and Duane's situation, a promising
enterprise may swiftly become a battlefield if not properly planned. This paper3will analyze the
blunders these friends made and provide advice on how they might have improved their
company's foundation for early success.
Pre-Business Formation: Laying the Groundwork
A well-drafted LLC agreement is essential for defining ownership rights and responsibilities
(Reed & Reed, 2007). One big mistake the group of friends made was not talking about the
particulars of their business plan before they invested3their money into it. Effective
communication and conflict resolution strategies, such as mediation, are critical in preventing
disputes among business partners (Jones & Latreille, 2011). When you're with friends, it's easy to
let down your guard and think that trouble won't happen to you. To keep everyone on the same
page and to reduce the risk of ruining any friendships it is important to establish a business
relationship, where it is imperative to have structure, expectations, and formal agreements. The
first step should have been to create a comprehensive business plan. With this method,
everybody's part in the company would be clearly spelled out, along with how much time and
effort is expected of them. Unfortunately, Duane had a full-time job and could only help part-
time. However, Adam had the idea and was ready to give it his all. It would have been fair to
factor in this difference in engagement when determining ownership percentages and profit
sharing.
Business Formation Analysis: Night Market Startup 3
A buy-in agreement outlining both the financial and intangible value of each participant's
contributions is also critical. According to Davidson and Dutia (1991), many small firms struggle
with liquidity and profitability issues, which can hinder their overall success. Clearly, Adam,
Betty, Camala, and Duane all chipped in two grand in cash. However, sweat equity which is the
value of one's time and effort which is also a vital was not factored into the agreement. Future
arguments could have been prevented if this had been defined and initially agreed upon.
Choosing the Right Business Structure
The friends chose to form a Limited Liability Company (LLC), which provides certain benefits
like personal liability protection and flexibility in profit distribution. The LP would3have been
more appropriate for Adam and Betty, who had invested in the most work, to be named general
partners in an LP and given control of the company, while Camala and Duane could have been
named limited partners and given less control but still had a financial stake. Considering the
different levels of involvement, this arrangement would have worked better. As Paul states in
Colossians 3:23, “Whatever you do, work at it with all your heart, as working for the Lord, not
for human masters.” This verse talks about how important it is to fully commit to your duties,
which the four friends were not doing evenly.
The way the group chose to value profit sharing3was a big mistake. All of them put in $2,000, but
things like time and effort that weren't money did not count toward their stock shares. Adam's
full-time dedication and Betty's decision to quit her part-time job were both big
contributions3that weren't properly weighed. On the other hand, Camala's limited participation
and Duane's marketing help, while appreciated, did not translate into equal ownership stakes in
the day-to-day running of the business.
Business Formation Analysis: Night Market Startup 4
To make ownership fair among the friends, they should3have thought about cash investments,
work equity, and flexible ways to share the profits instead of just considering that everyone had
the same case investment since everyone's roles in the company weren't evenly distributed. First,
they could have kept a base ownership share equal to the amount of money they put in at the
beginning. Then, depending on time and effort, they could have given more ownership points or
profit-sharing percentages. As an example, Adam and Betty might each get an extra 10 to 15
percent of the business because they are more involved. Finally, the friends could have decided
on a tiered profit-sharing plan. This way, everyone would get a base percentage based on how
much money they put in, and the rest would be split up based on how much time and work they
put in. To carry out the agreement in this way, there would have had to be open conversations
and clear records. Proverbs 15:22 says, "Plans fail because they don't have advice, but they
succeed because they have many advisers." They could have set up these deals correctly if they
had talked to a business consultant or lawyer.
The Importance of an Operating Agreement
Despite the state not requiring an operating agreement, it is a critical document for any LLC.
This agreement should have included ownership percentages and voting rights, profit distribution
and compensation, along with buyout and exit strategies. Reed and Reed (2007) emphasize the
importance of having a comprehensive operating agreement for LLCs to prevent management
disputes. By outlining the ownership percentages and voting rights the group would have been
able to prevent disputes like the ones Adam and Betty initiated by trying to buy out Camala and
Duane unfairly. With management responsibilities established they would have been able to
clarify who is responsible for managing what parts of the business. If profit distribution and
compensation were laid out the group would have had a plan set for how profits would be
Business Formation Analysis: Night Market Startup 5
divided and whether members contributing more labor receive additional compensation or not
and there would have been an argument of who should get more based on their involvement in
the company or lack thereof. Effective financial planning is crucial for small businesses to avoid
common pitfalls such as debt and liquidity problems (Davidson & Dutia, 1991). Last but not
least, a buy out and exit plan would have made it clear for people who want to leave how to do
so, making sure they got paid fairly and had a smooth transition. Adam and Betty’s behavior of
blocking bank accounts and business documents would likely have been prevented if there was a
clear operating agreement with agreed-upon access rights and decision-making processes. Jones
and Latreille (2011) highlight that using mediation in small businesses can mitigate conflicts and
facilitate more collaborative decision-making processes. This should have been the route taken
before Betty and Adam decided to partake in this behavior or even after to come to a resolution
for the problem.
Conclusion
In this case, the friends didn't set up their business properly because they didn't have important
conversations and make important decisions before they started. They could have avoided the
problems that came up if they had taken the time to spell out their jobs, agree on who owned the
business and how to split the profits based on contributions, and write up a full operating
agreement. As noted by Reed and Reed (2007), the lack of a proper agreement can lead to
complications in business operations and decision-making processes. They could have put their
business on the path to success by choosing the right business structure, giving credit where
credit is due, and following biblical principles of truth and honesty.
Business Formation Analysis: Night Market Startup 6
References
Colossians 3:23, New International Version. Retrieved from Bible Gateway.
Davidson, W. N., III, & Dutia, D. (1991). Debt, Liquidity, and Profitability Problems in Small
Firms. Entrepreneurship Theory and Practice, 16(1), 53-64.
Jones, R., & Latreille, P. (2011). Communication, Conflict, and the Use of Mediation in Small
and Medium-Sized Enterprises. Journal of Small Business Management, 49(1), 104-125.
Proverbs 15:22, New International Version. Retrieved from Bible Gateway.
Reed, L. L., & Reed, A. M. (2007). Practical Guide to LLCs. Business Lawyer, 62(2), 539-558.
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