Top Reasons Partnerships Fail
Surely everyone can agree that starting a business or being in a San Diego business with friends as partners can be rewarding at a personal or emotional level as well as an economic level. You and your friends enjoy each other’s company, share common visions and outlooks on life, and share the desire to build both a business and something meaningful. That being said, many partnerships fail and they fail for a variety of predictable reasons. Forbes Magazine has famously said that “partnerships are harder than marriage.” Here are the top reasons that partnerships fail.
Top Reasons San Diego Partnerships Fail: No Partnership Agreement
Yes, you and your partner/s are best friends. You would never do anything to damage the relationship with your best friend. We here at San Diego Corporate Law agree wholeheartedly and, thus we say you should have a written partnership agreement. Some new partners look with suspicion on a partnership agreement, sort of like some view a prenuptial agreement. Suggesting the need for a partnership agreement is like saying “we are not really best friends.”
That, however, is false. In fact, the opposite is true. If you are really best friends and want to remain best friends, then you need a partnership agreement. At this moment, you need to have an agreement that plans for the unexpected, plans for changes, plans for the evolution of your friendship and your business. Even the best of friends will have arguments and disputes, but a pre-written agreement can help settle problems such as the following:
- What is contributed to the partnership and by whom?
- What if more capital or resources are needed?
- How is money taken out of the partnership? Salary? Wages? Distributions and draws?
- What about financing and taking on debt?
- What about time commitments?
- Who is “in charge?”
- Who has the “final decision?”
- How are business decisions to be made?
- Who can bind the partnership? — incurring debts and contractual obligations
- What happens if there is death or disability?
- What about a divorce? What is the involvement of surviving family members?
A talented California business attorney can help you avoid these pitfalls with a strong custom-drafted partnership agreement. Handshakes are not enough.
Top Reasons San Diego Partnerships Fail: Unequal Levels of Input
As we have discussed before, partnerships succeed and function best when the partners are devoting equal time and resources to running the business. As a corollary, unequal input can be identified as among the top reasons that partnerships fail. Often, this is something that occurs over time. At the beginning, everyone is putting in equal time and money. But, as the company grows, that may change.
Employment and partnership agreements can help alleviate problems that can arise from unequal input. If one partner is spending all of his/her time running the business, set up an employment contract that rewards the dedicated work.
Top Reasons San Diego Partnerships Fail: Unequal Levels of Risk
In a similar way, one of the top reasons that partnerships fail is because unequal levels of risk. With San Diego general partnerships, each partner is 100% personally liable (jointly and severally) for the business debts, obligations, and liabilities. This means that a bank or the landlord can come after the assets of just one partner to satisfy the debts of the partnership. Consequently, if one partner’s personal and family assets become decisively out of balance with the assets of the other partners, that partner’s risks are now decisively higher. Creditors will go after the assets of the wealthier partner. Liquidity also factors in here. When one or more partner feels significantly more exposed for the debts and obligations of the partnership, the partnership is in danger.
Again, a written partnership agreement can help resolve this problem. Alternatively, it may be time to evolve the partnership into an LLC or a California corporation.
Top Reasons San Diego Partnerships Fail: Failure to Have Other Important Agreements
You are running a business and, as such, there are important business contracts that should be in place. These include:
- Employment contracts: If one partner is doing most of the day-to-day work, an employment agreement is needed to set the parameters and expectations
- Nondisclosure agreements: Almost every business has trade secrets including something as simple as the customer list; the partners need to agree to not disclose such
- Confidentiality agreements: Same as above
- Founders or buyout agreement: Related to conditions and timing of any partners exiting the business
- Dissolution agreement: How does the partnership wind up? if necessary; who gets to use the trade secrets; who ends up owning property devoted to the partnership?
Contact San Diego Corporate Law Today
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has extensive experience in drafting partnership agreements and the other contracts and agreements necessary for running your business. Mr. Leonard can be reached at (858) 483-9200 or by email.