As a full-service business law firm serving the needs of small to mid-size businesses and privately held companies, the attorneys at Liff, Walsh & Simmons provide legal services during each stage of business ownership, from startup to breakup. Many of our clients are business partnerships, and I use that term to include entities formed as corporations or limited liability companies. Business partnerships are an attractive option for a startup because it allows people to share the costs and risks associated with establishing a business. Co-ownership usually occurs between people with similar passions and complementary skill sets. At first, partners have a shared vision and passion, but unfortunately, the U.S. Bureau of Labor Statistics reports that 70% of business partnerships fail. In this and following posts, I will focus on the breakup phase of a business relationship and highlight some of the most common reasons why business partnerships fail and how you can avoid it.
One reason that business partnerships fail is the lack of separation between personal and business relationships. Many business partnerships are co-owned by family members or friends. In these situations, it is vitally important that each owner provides value to the business above and beyond their personal relationships. The business partnership should be based on each co-owner’s complementary strengths, talents, personalities, and experiences. Although trust is usually established in close personal relationships between family members or friends, there are also years of interactions that can negatively influence business decisions. Too often there is an unwillingness to engage in difficult business discussions involving finances or goals due to a fear of damaging the personal relationship.
As mentioned above, co-owners rely on contributions from each other to create a successful business. Many times, resentment and conflict arise between partners because there is a feeling that one partner is not “pulling their weight” and failing to match the personal or financial sacrifices of another partner. This situation often occurs when one partner contributes to the business in ways other than financial, and it is difficult to gauge and recognize that contribution. Additionally, co-owners may be at different stages of their lives and can be distracted from equally contributing to the business by, for example, other business interests, children, or health issues. However, despite the level of contribution, alignment between partners is necessary because business decisions will affect all partners either financially or legally.
Unsuccessful business ventures can break up families and permanently destroy friendships. As a result, you must strive to keep your business and personal lives separate and give your business partnership the best chance for success. Unequal contribution and close personal relationships among partners may not present a problem if expectations are established in advance. Therefore, having a comprehensive partnership or operating agreement is vital so that these issues can be clearly articulated and understood by all partners before starting the business. In this way, you can mitigate some of the conflicts that are likely to arise in your business partnership.
Here at Liff, Walsh and Simmons, my colleagues and I have helped many business partners sort out their differences and agree on equitable resolutions. To avoid major battles and breakups, we encourage our clients to review their corporate documents and update their operating agreements to make sure they reflect the current state of the business and the relationships of its owners. If you have questions about a particular business issue or would like more information about the right way to form a business entity, partnership, or create effective operating agreements and corporate documents, email me at Jcrossan@liffwalsh.com or call me direct at (443) 569-7264.
About Liff, Walsh & Simmons
Liff, Walsh & Simmons is a full-service business law firm serving the legal needs of small businesses and privately held companies, their owners and operators, and individuals throughout their business and family life cycles. From helping entrepreneurs bring their business visions to market, to representing middle-market companies in business transactions and disputes, to preserving the wealth that a family business has worked so hard to earn, we take pride in providing value-driven solutions and great results. Our responsive service is focused on general and transactional business advice, commercial and civil litigation, real estate, land use, finance, and estate planning and administration.