Is it wise to always use a contract when doing business with friends?

Is it wise to use a contract when doing business with friends? Even with close friends?

I don't understand how to separate friendships and business. It feels cold and almost inhumane to completely disregard friendship when doing business, as if to pretend years of friendship don't exist.

Why is a business contract necessary if you can communicate well with your friend?

It is absolutely necessary to use a contract when doing business with friends, in fact if you value the friendship, it becomes even more important!

Contracts really have two purposes.

The one that people think of is 'to take someone to court if things don't work out'. This is the secondary, and least used, purpose of a contract. I have signed hundreds of contracts in my life, only about three of which ever got to a 'my lawyer and your lawyer' discussion, and none of which went to court.

The primary purpose of a contract is to make sure that both parties have talked through things and understand exactly what they are agreeing to. If there is ever any future question about what they have agreed on, there is a document to return to. I have re-read contracts I have signed hundreds of times, and re-read them together with the other party to settle an argument tens of times, to remind me/us 'what did I/we promise'.

People's memories are fallible. Two people will remember different pieces of the past and remember agreeing to different things. If you rely only on memories with friends, you will almost certainly have arguments over what happened in the past, and even if you use the goodwill of the friendship to solve the problems, one or the other will feel poorly treated and will start to resent the other ('I'm always compromising'), which is a common thing to feel even in what some would call the closest of friendships: marriages.

If you agree things, put them in writing: in a contract. You don't necessarily need a lawyer. A contract simply needs to say who the two people are, what they agree to, and be signed by both. It can be scribbled by hand on a piece of toilet paper and still be binding. So by all means keep the lawyers out of it if that is the concern. Just make sure you have a contract! You can always redo it later with a lawyer using the current contract as a template if you have to.

Note: What lawyers are good for in contracts is putting in clauses to deal with the 'what ifs', such as 'what if my friend leaves the company and I stay'. If you're doing the contract without lawyers, spend time thinking through a bunch of those 'what ifs' if you can. And if your contract concerns shares in a company, be sure you include 'vesting'!

I'd say there's two things that play into it. One - the amount of investment you're putting into it. More investment = more need for legalities. Two - if you have business before with them and they always come through, less need for paperwork. I've got a friend I've known for over 20 years, whenever I do business with him, it is all verbal, there is no need to formalize it because he is a very honorable guy, I completely trust him and vice-versa. But that's probably rare.

It is better to have a friendship out of a business than a business out of a friendship.

My experience is be very careful going into business with a friend - if you do you owe it to yourself and your friendship to have everything clear from the start and have in place a WRITTEN contract or at the the very least a memorandum of understanding in place.

Remember mixing business and friends frequently result in situations people find themselves in when they lend money to friends and things go wrong, you have to demand your money back, there are hurt feelings or worse.