A business partnership refers to any relationship where two or more entities pursue a business venture. Furthermore, business partnerships commonly take three forms including general partnerships, limited partnerships, and limited liability partnerships. A general partnership refers to a business relationship where two or more people join together—and are all considered a general partner—to do business in an attempt to make a profit. A limited partnership must include both general and limited partners. The difference between these two entities is that personal liability for company debts belongs to the general partners while the limited partner’s personal assets are protected. Finally, limited liability partnerships protect each partner of the company from liability or responsibility that occurs from other member’s negligence or misconduct.
While every company is different, almost 50 percent of business partnerships break up within 4 years of formation. Thus, below are some of the most common reasons why business partnerships break up, how to protect your assets from business partnership breakups, and how to effectively break up with your business partner.
Common Reasons Why Business Partnerships Breakup
Below are the most common reasons why business partnerships breakup.
Unequal Work
One of the most common reasons why business partnerships breakup is because members of the company start the venture believing that each partner will take on an equal amount of work. However, in actuality, one or multiple partners work much more than the other partner(s). The easiest way to combat this issue is to sit down and have every partner discuss their responsibilities and if one partner wants to work less, they can agree to take less of an ownership share of the company. While this is ideal, in most cases, partners will start out all working as hard as each other. Further, as the business changes and grow, one partner will end up taking a larger share of the company responsibilities.
To prevent a business breakup, both partners must constantly communicate with each other about how their actual responsibilities match up with their expected responsibilities before creating the business. This is imperative as when partners feel like they cannot express their frustrations, irreparable damage can be done to the business partnership.
Your Partner is Behaving Irresponsibly
No matter if a business is small or large, if one partner of the company is acting irresponsibly, it can put the business in harm’s way. The most common irresponsible actions that can seriously hurt businesses include inappropriate conduct with employees or clients, gambling away company profits, or showing up to work while under the influence of drugs or alcohol. While a partner may only be partaking in these kinds of activities for a short period of time, it is imperative that you and the other partners hold an intervention soon after the inappropriate behavior begins.
While different for every business, this intervention should focus on how to help the afflicted party while also telling them that if they do not change their actions, the business will have to distance itself from them. Finally, even if the partner is a friend or family member, you must stand your ground as their irresponsible behavior can damage your business’s reputation and financial viability.
Your Partner is not Being Honest
Trust and honesty are some of the most important characteristics of not only a successful company but also a business partnership. Without trust and honesty, a business partnership can fall apart extremely quickly. This is true no matter if one partner lies about company finances, the amount of work they are doing, or the potential of partnering with another business within the industry. Additionally, while one partner lying can hurt the business partnership, it can also be a result of illegal behavior such as embezzlement, tax fraud, and insider trading. To avoid the legal chaos that follows one of these crimes, it is imperative that you review your business relationship with a partner if you feel that they are not being completely honest with you.
Different Working Styles
Different working styles may not be a big deal. However, for some people, they may view the way or hours their partner works as a deal-breaker. These different working styles may stem from personal preferences or simply different living situations. For example, one partner may need to write everything down while the other partner does not need to or may feel as though taking notes is a waste of time. In this situation, the partner taking notes may feel like the other member is not as invested in the business as they should be.
Another reason for different working styles is that one partner has a family with children while the other is single. In this case, the partner with a family wants to work early and spend time with their family at night. However, the other partner would rather start the day later and work all night. No matter the case, if not addressed quickly, different working styles could easily destroy a business partnership.
Partners Have Different Visions or Values
Having a clear vision for future business plans and values on which these plans will be built is extremely important to a business’s success. Thus, if partners have different visions and values for the company, conflict is inevitable. Additionally, both partners may have compatible visions and values when they first open a business. However, as the company grows, one partner may feel as though the companies vision and values need to change. In some cases, one partner feels like these changes must be made, yet the other partner does not. In this situation, the partnership is destined for failure.
Unwillingness to Compromise
Finally, businesses may thrive by having a central vision or set of values. However, it is impossible for partners to agree on everything. Thus, if one or both partners in a business are not willing to compromise on any topics, conflict will ensue. If you are in a business venture with someone not willing to compromise, they will make all the decisions. This is true even when they do not have your consent. This could lead to disastrous consequences all of which you had no say in. To protect your financial interests, you should leave a business partnership if your partner cannot compromise.
How To Protect Yourself in a Business Partnership
There is a myriad of issues that business partners may experience. Thus, it is vital you protect your financial interests before entering a partnership. Below are some of the ways that you can protect your interests before the partnership even begins.
- Have the books kept by a commercial accountant or accounting agency.
- Record and keep the minutes of all business meetings.
- Have a business lawyer draft your partnership agreement.
- Decide if partners should sign non-solicit agreements or non-compete agreements.
- Ensure that each partner understands his or her own fiduciary duty.
- Spell out in writing how the partnership’s dissolution will be handled.
- Spell out in writing how partners are to be compensated and assets are to be divided.
These are the best ways to protect your own interests. However, the root of these suggestions stems from the principle that a partnership contract should clearly state what happens when one partner leaves the company. Furthermore, the contract should discuss what happens both when someone leaves the business voluntarily or involuntarily. Finally, it may be possible to create this agreement after the company begins operations. However, it is best to create a contract before the partnership ever begins.
How to Breakup Your Business Partner
Breaking up with your business partner, although sometimes necessary, is not always easy to execute. However, below are a few ways to help both parties move forward and avoid expensive and time-consuming legal conflict.
Make a Clean and Quick Break
If you experience any of these issues, you must be upfront and honest with your partner when terminating the partnership. This may allow them to change their behavior and save the business. However, at the very least you are giving them enough of a warning so that they can make new plans. Additionally, by giving them a heads up, you can hopefully save your personal relationship and keep things from getting personal. Another way to keep things from getting personal is to utilize data and key performance indicators (KPIs). Hard data points will help you prove your concerns.
Make Feedback a Constant Theme
To prevent emotions from getting in the way of a partnership breakup, you must constantly give the other partners feedback. The reason for this is that a partner used to criticisim won’t be as emotional when you terminate the partnership. Additionally, if you constantly express your concerns, you may be able to prevent the partnership from breaking up.
Contact Our DC Law Office for More Information
Finally, for more on business partnership breakups, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding business and contract law, check out our blog.