The Trouble with Partnerships
Going into business with a partner can have many benefits. Partners often bring a complementary set of skills to a business that can make it stronger, and you can share the risks, stresses, and rewards.
However, partnerships can also be problematic. Here are five potential trouble spots that can strain your relationship or even destroy your business.
1. Lack of shared vision — If you and your partner have different ideas about how to operate the business and its strategic direction, this can lead to friction. Every successful company needs to have a clear business plan and financial projections to back it up. From a lender’s perspective, companies with quibbling owners are a high risk. Before investing funds and opening your doors, draw up and sign an iron-clad partnership agreement that outlines the rights and responsibilities of each partner and how disputes will be resolved.
2. Different management styles — A partnership is like a marriage in some ways. If the partners are both active in managing the business, they’re likely to trip over each other if their roles are not clearly defined. If, for example, you like to spend time chatting with customers and are willing to take on custom orders, but your partner manages in a more rigid style, you may frequently find yourselves at loggerheads. This can be amplified if both partners are trying to manage staff. Consider a potential partner’s personality and management style before tying the knot.
3. Liability — One of the first decisions any business must make is which legal business structure to choose. A general partnership has the benefit over corporate structures that each party simply records her share of revenues and expenses on her personal taxes, reducing the amount of paperwork and administration required. A weakness of the general partnership structure is that each partner can be held personally responsible for the actions of all partners. For example, if your partner gave a customer advice that harmed him, you may be sued for it: There is no corporate veil to limit your liability.
4. Uneven capital contributions and time commitments — The two main contributions that you and your partner bring to the partnership are money and time. Based on how much of each you plan to contribute, you both will have to decide the ownership split. For example, if your partner plans on contributing one third of the startup funds and work in the business the same amount of time that you do, you need to decide together how to split the profits. You can make any ownership percentage decisions that make sense for both of you, but you have to do it before you start operations — and it should be documented in the partnership agreement. Most partnership arguments occur because one partner or the other feels that she is contributing more than she is profiting.
5. Divergent exit goals — Leaving your business is likely to be one of the last things on your mind when you’re first starting up, but it’s an important consideration. Do you plan to sell the business at a fixed point in time or pass it on to your heirs? The decision is compounded exponentially when partners are involved. Each partner may have a different vision of exiting the business and, unless these issues are worked out in the partnership agreement, the issue could rear its ugly head if one partner wants out and another does not.
Partnerships can be a boon to starting a business, but they are complex relationships from both legal and interpersonal standpoints. To avoid a rocky partnership, discuss these issues together ahead of time — and formalize your arrangement in a legal partnership agreement.