The Problem with Partnerships

Partnerships are a great way to bring additional expertise and capital into a business. However, this form of business structure brings with it some built-in headaches. Be prepared—there is no such thing as a partnership without conflict. The question is not whether there will be conflict, but how bad it will be.

I know what you’re thinking, “Not us. I trust my partner implicitly. We see eye-to-eye on all the important issues.” That may be true, but the fact is that it is rarely the “big stuff” that is at the heart of misunderstandings. Hurt feelings, a jealous spouse, and “simple” miscommunications are among the many “little things” that cause partnerships to decay. It takes years to build trust and only a matter of seconds for it to erode. No one is immune—not even you.

The messiest kind of partnership is the 50/50 split. When you are at a point of mutual agreement, splitting the business 50/50 with a partner may seem fair. However, 50/50 partnerships are almost never fair. Someone almost always ends up feeling cheated because they contributed more capital, brought in more business, or did more work.

The biggest problem with the 50/50 split is the issue of control—no one has any. When disagreements arise (and they will) one of you needs the authority to make a binding decision. If your partner doesn’t trust you with that responsibility—or visa versa—your business will be starting out with not one but three strikes against you.

Don’t be too quick to offer partnership to an associate in return for a great business idea, a foot-in-the-door with a major customer, or other contribution. There are other ways to compensate people for their contributions. For example, you could propose to pay them $25,000 for their idea, if it works. If it doesn’t work they’ve lost nothing and gained nothing.

If you decide that a partnership is the best form of organization for your business, be sure to have an attorney help you prepare a partnership agreement. A partnership agreement will provide a solid foundation for future business decisions and will help protect you and your business from some of the pitfalls of partnering.

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