While setting up a partnership or multi-member LLC, each partner or member having equal ownership in the entity makes a lot of sense. Even though the partners may be doing different work in different capacities (i.e., one person creates the product, one person does the marketing, one person provides the capital, etc.), it’s still understood that each does “equal” work. Partnerships can go great but they can also go horribly wrong.
If you are considering going into business with a “partner”, here are 5 situations that need to be considered.
When the partnerships are of a personal nature, proceed with caution
Be aware of partnerships that start off as personal relationships such as friends, family or a significant other. They start off with the best of intentions, but the entire business partnership can go south if disagreements occur. These disagreements could get so bad that any business decision become deadlocked and nothing happens.
Arguments hurt not only those involved, but also the company and customer confidence
Arguments not only affect those involved, but can also damage business relationships, profits, customer and supplier confidence, and employee morale.
Months and years of court cases could follow a sour partnership
The impasses we talked about earlier can take years to get resolved and may even go to court where a judge could ultimately order the selling or dissolution of the company.
Deadlock, Dragging on, and Decreases
One side of the partnership may cause further deadlock and complications by dragging their feet in the dissolution process. They may drag their feet because they see the negative effects like the loss of their profession or a substantial decrease in the value of their interest.
Partnerships end with Dissolution
Even though dissolution of a partnership may preserve a business, it does so without the original owners being a part of it. In other words, the business would go on, but the partnership as envisioned by the founding owners would not.
The Path to a Successful Partnership
Whenever I meet with clients, I always recommend that when a partnership or multi-member LLC is initially formed, the partners enter into a partnership agreement or LLC Operating Agreement. This Agreement lays out the process by which decisions are made and how they will be resolved in the event of a deadlock. In the event the partners can’t agree, the Agreement also contains a pre-determined formula that lays out the terms of how a partner may exit the partnership through a purchase of the departing partner’s interest. The formula describes the method of valuing the partnership interest and the terms of payment. Such provisions in the Agreement have been very successful in the past in situations where neither partner wanted to sell, but realized they should reach an agreement before the court made a decision for them.
As you can see, a lot of planning must be done both before and during the formation of a partnership or LLC to head-off any potential disputes in the future. If you are thinking about setting up a business entity in the future, please contact my office to schedule an appointment to go over the issues that should be addressed before moving forward.