The Hidden Costs of Going into Business with Family and Friends
Starting a company with family or friends feels natural — until money, roles, and resentment creep in. Here’s how to protect both.
Starting a business often begins around the kitchen table. You’ve got an idea, some energy, and people you trust most — your spouse, a sibling, a parent, or even a close friend. It feels natural to lean on them for capital, labor, or simply moral support. After all, who better to build with than those who already know you?
But while family and friendships can be the strongest bonds in our personal lives, they can become the most fragile when money, contracts, and risk enter the picture. As a lawyer who has spent nearly two decades helping entrepreneurs, I can tell you this: the legal issues are usually solvable. It’s the human issues that do the damage.
In this post, I’ll walk you through the hidden costs of mixing business with family and friends, and give you strategies to protect both your relationships and your company.
The Emotional Tax
The first hidden cost isn’t measured in dollars — it’s measured in strained dinners, awkward holidays, and friendships that suddenly feel transactional. When family and friends become business partners, every decision carries extra weight.
Disagreements feel personal. A dispute over inventory isn’t just about inventory; it’s about whether your brother respects your judgment.
Success gets complicated. If the business does well, questions about “who deserves what” can creep in.
Failure hits harder. A failed venture with a stranger is just a lesson. With family, it can feel like betrayal.
This emotional tax can be even greater when your spouse or romantic partner is also your business partner. Disagreements at work often follow you home, blurring the line between professional and personal life.
And here’s one of the hardest questions few people consider: what happens when you need to reassign a family member or close friend to a different role — maybe one they see as a step down — because that’s what the business needs? Even if it’s the right call for the company, it can feel like a demotion to them, straining both the business and the relationship.
These emotional costs often outweigh any financial gain.
The Financial Risks
When you mix business with family and friends, the lines between personal and professional finances blur quickly. Some common risks:
Personal Guarantees
Banks often require small business loans to be personally guaranteed. If you and your cousin both sign, and the business fails, the bank doesn’t care who’s “responsible.” They’ll chase whoever has assets.Using Personal Credit
Many small businesses are jump-started on personal credit cards. If a friend or sibling agrees to “help out” with theirs, you’ve just entangled their financial health with your risk.Co-Mingled Funds
Informal loans or “I’ll cover this month’s rent” often go undocumented. That makes it nearly impossible to track who invested what, or to prove your position if the business is sold or wound down.
These money issues don’t just threaten the business — they can impact your ability to buy a home, pay for college, or retire.
The Legal Hazards
Too often, friends and family operate on trust instead of contracts. That works until it doesn’t. Some common legal pitfalls include:
Undefined Ownership. If your brother put in $10,000, does that make him a co-owner or just a lender? Without an operating agreement or loan contract, it’s up for debate.
Decision-Making Deadlock. Two equal owners who disagree have no way forward unless you’ve planned for tie-breaking mechanisms.
Unclear Exit Strategies. What happens if your best friend wants out in two years? Can they sell to anyone? Do you have to buy them out?
Courts are filled with cases where verbal promises between friends and family became multi-year legal battles.
The Opportunity Costs
Finally, there’s the cost you don’t see until much later: the opportunities you miss because you locked yourself into a structure that doesn’t work.
For example:
You may not be able to bring in outside investors because ownership is tied up among relatives who don’t agree.
You may pass on growth opportunities because you don’t want to strain family relationships with higher risk.
You may lose credibility with lenders or vendors if your internal disputes spill into your operations.
In other words, mixing business with family and friends can limit your future options in ways you don’t anticipate at the start.
Best Practices for Protecting Relationships and Business
So how do you pursue business with the people you care about while minimizing these hidden costs? Here are a few strategies:
1. Put Everything in Writing
Contracts aren’t about mistrust — they’re about clarity. At a minimum, you need:
An operating agreement (for LLCs) or shareholder agreement (for corporations).
Clear records of who invested what and how returns are distributed.
Written loan agreements if money is borrowed.
2. Define Roles and Responsibilities
Don’t assume that “we’ll both do whatever needs done.” Spell out who is in charge of operations, finances, sales, and compliance. Clarity reduces resentment.
3. Plan for Exit Scenarios
Decide in advance:
How can someone leave the business?
How is their share valued?
Who has the right to buy them out?
4. Treat Loans and Investments Differently
If your aunt wants to “help out,” be clear: is it a loan with repayment terms, or an equity investment with ownership rights? Mixing the two is a recipe for conflict.
5. Keep Communication Professional
It’s tempting to talk business at family gatherings. Don’t. Keep business discussions in scheduled meetings with agendas, minutes, and follow-ups. That separation preserves both the family dynamic and the business relationship.
A Real-World Example
I’ve seen countless examples where one person provides the capital and another person provides a lot of the labor. A lot of disputes arise about who “deserves” what. Each person has a perspective, and much of it is driven not by the deal at the beginning, but by how the business relationship and contributions change over time.
Often, no new capital goes into the business after the initial setup. But as the company grows, one person may be pouring in the blood, sweat, and tears to keep things moving. They start to feel like they deserve a bigger share of the profits or a bigger say in how things are run — even though that wasn’t the original deal.
The lesson: plan for those changes. Don’t assume the deal you make today will still make sense in three years.
Five Questions to Ask Before Mixing Business with Family or Friends
If you’re considering starting a venture with someone close to you, here’s a quick gut check:
What exactly are we each putting in?
(Money, time, skills, equipment — write it down.)What do we each get in return?
(Salary, profit share, repayment, ownership interest — be specific.)Who gets to make decisions — and how are ties broken?
(One manager? Majority vote? Outside advisor?)What happens if someone wants out, can’t contribute anymore, or passes away?
(Spell out buyout rules and succession plans.)Are we willing to risk the relationship if the business fails?
(If the answer is “no,” reconsider whether this is the right partnership.)
The Bottom Line
Starting a business with family or close friends can be rewarding — you get to share the highs and lows with people you care about most. But it also carries hidden costs that, if ignored, can ruin relationships and businesses alike.
The good news? With intentional planning, clear agreements, and healthy boundaries, you can protect both your venture and your bonds.
If you’re considering going into business with family or friends, do yourself a favor: treat it like you would with a stranger. Put everything in writing, define the rules, and make space for both the business and the relationship to thrive.
Because at the end of the day, the only thing worse than a failed business is losing the people you care about most along with it.