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02.01.2016

Partnerships often fail due to disagreements over business decisions

Starting a business in Indiana carries a certain degree of risk. While entrepreneurs start a business with the highest of hopes and expectations, the grim statistics suggest that many businesses will not have long life expectancies. The Business 2 Community website reports that 33 percent of new businesses fail in their first six months. Fifty percent will fail within the first three years. While varying figures have been given for the number of partnerships that will founder, the InfoComm International website recently suggested that around 70 percent of business partnerships will ultimately fail. Those that succeed, of course, can prove to be financially lucrative for the business partners.

Partnerships can fail for reasons other than competition, a bad business plan or a challenging economy. According to Inc. magazine, partnerships are often put on the road to dissolution for the following reasons: (1) one of the partners divorces; (2) a partner attempts to bring a spouse or relative into the business; (3) disagreements arise among the partners; (4) one of the partners suffers a medical misfortune; or (5) one partner violates his or her fiduciary obligation to the other partners by usurping business opportunities.

Disagreements that arise among partners on business matters are often the reason many partnerships fail. Forbes magazine notes that partners may spend more waking hours with each other than with their spouses. Unfortunately, spending too much time at the business means that you have more opportunities to interact with your business partners and the nature of your interactions can “tend to be more intense.” This would be especially true if business conditions were turning out to be challenging.

The Intuit QuickBooks website observes that a business partnership can be every bit as complicated as a marriage. Unfortunately, “like matrimony, some partnerships end unhappily.” There are sometimes warning signs that a partnership is in trouble. One red flag is where one partner says that he or she has far too little authority or far too many responsibilities. An unbalanced partnership cannot endure indefinitely. The ideal situation is one where each partner feels good about his or her contributions and the other partners’ efforts. Another major warning sign of trouble stems from financial disagreements. If there are fundamental disagreements about cash flow or how money is being spent, dissatisfaction and rancor quickly grows. Finally, disagreements arising out of fundamentally different work styles or work ethics can lead to friction between partners.

Partnership agreement

Before commencing to operate a business, partners should insist on having a written partnership agreement that protects their respective financial interests in the business. As observed by the U.S. Small Business Administration, even well-intentioned and honest partners can end up finding themselves in court if they do not have a written partnership agreement which includes their prior verbal understandings.

The SBA advises that the following is a list of items that should definitely be addressed in a partnership agreement:

  • Each partner’s contributions to the partnership.
  • The allocation of profits, losses, and draws.
  • The partners’ responsibilities and management duties.
  • The voting rules for decisionmaking.
  • How to admit new partners.
  • What happens upon the bankruptcy, withdrawal or death of a partner.

Finally, it is recommended that the partnership agreement set forth a mechanism for how to resolve any disagreements arising between the partners.

Seek legal advice

Those desiring to enter into a partnership should contact an Indiana attorney experienced in business formations. The attorney can advise on how a partnership agreement can be drafted that will protect each partner’s financial interest in the business.