How to Avoid a Bad Business Partnership; And Your Options if You Find Yourself in One
by JamieD, Former Moderator
- Created: October 26, 2009, 3:28 pm
One of the first steps of starting a business is determining what business structure is right for you. If you're not going in as a sole proprietor, a business partnership is a popular option. A business partnership is like a marriage - it takes a lot of hard work to keep it together, but if done correctly, can be very rewarding. Follow this quick guide for tips on how to keep your partnership healthy and what your options are if things take a turn for the worse.
Before you enter into a business partnership...
...know who you're getting involved with. It sounds like simple advice but following it can save you a whole lot of trouble on the back end. If you rush into a partnership for any reason then you may not have had time to really get to know your partner. Whether you're entering into your business with a new acquaintance or with your spouse, it's important to lay everything out on the table. Ask questions and deal with any issues that arise quickly. Don't let yourselves get wrapped up in the excitement of your new venture and let the details suffer. If you know as much as you can about your partner and vice versa, everything from personality strengths and weaknesses to financial backgrounds, you're most likely to set the foundation for a successful partnership.
...consider appropriate percentages for your situation. Business partnerships are often formed on the premise of a 50-50 partnership. While this may end up being the right agreement for you, it's important to know that in a 50-50 agreement, no partner can make any decisions without the other's approval. Many business partners have success with this combination but remember that it isn't the only choice. If you consider a 51-49 ratio, or another weighted split, one partner has final authority to end deadlocks on business decision.
...create and sign a detailed operating agreement. One of the most, if not the most, important documents you'll need for your partnership is an Operating Agreement. The operating agreement should detail the internal operations of your business and should be created and agreed upon during startup. Any issues that could arise between partners should be able to be resolved by referring to the operating agreement that you collaborated on to create. If you find yourself unhappy in your partnership, your operating agreement will be one of your best chances to prove resolution. If you don't provide a custom operating agreement, you'll be defaulted to your state's generic version, which will most likely not cover the intricacies of your business.
If you find yourself in a bad business partnership...
...update your operating agreement. Partners can update their operating agreement to use a new weighted division (51-49). If the partners agree to changing the deadlock then creating a majority share ratio can reslove these issues. Unfortunately, if you're in a bad business partnership, it may be difficult to get one partner to relinquish their control over the business - forcing you to resort to one of the other options.
...offer to buy out your partner's share or consider letting them buy outyour share. The least messy way to deal with a bad business partnership is through a buyout. This option takes out the uncertainty factor of letting a court decide the fate of your business. Unfortunately, this leaves one partner with everything and one with nothing. However, in a bad situation, it may be the best option to cut your loses and move on. In this situation, it would be appropriate to consult a small business lawyer and try to make the process as easy as possible.
...you can legally dissolve your partnership. If you find yourself in a situation where you are not getting along with your business partner, you may need to consider dissolving your partnership. In a 50-50 agreement, business decisions can become deadlocked - meaning nobody can agree, so nothing gets done. In this case, most states have a procedure to dissolve these agreements. You must petition your state court to dissolve the partnership. The court will determine how the business will be dissolved and who gets what.
For more information, visit your state's government portal and look for a section on dissolving a business (Utah.gov provides a good example of How to Dissolve a Business).
Your operating agreement will be extremely important to the decisions of the court. Be sure to review this document and make sure your claims are backed up in writing. If you don't have an operating agreement, your fate will be in the hands of the state. In many cases the 'right' party doesn't always win and a court may be determined to divide all assets 50-50, leaving both parties ill-equipped to continue a business.
In most cases, a court-mandated arrangement should be a last resort. Court proceedings can eat up a lot of time and money, and don't always turn out the way you hope. If you're considering a legal dissolution of your business partnership, your best bet is discuss your situation with a smallbusiness lawyer.
Appreciate The Valueof Effective Planning
The best way to avoid a bad business partnership is by protecting yourself BEFORE it starts. Once your partnership turns bad, your options are limited. Be sure to spend the time necessary to think through all decisions beforehand and remember to create a detailed operating agreement - it may end up saving your partnership one day!
- IRS Checklist for Closing a Business
- Getting Started - SBA Guide to Partnership Agreements
- IRS Tax Guide for Partnerships
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