Why Partnerships Are Bad

May 11, 2023by Jeffrey Davis

People don’t take partnerships seriously enough. I’ve been in my share of business partnerships, learned some hard lessons and got rid of the toxic relationships relatively unscathed — luckily. I’ve also represented many partnerships in buyouts and in complex business-divorce litigation. Breakups are ugly and expensive. People seem to overlook the fact that business partnerships are a legally binding and enforceable relationship.  Entering into a partnership is really no different than getting married , yet people seem to be entering into these incredibly complex and serious business relationships without a single thought as to whether the business relationship is truly in their best interest. Ive seen people put more thought into a drunken Vegas marriage than in the suitability and compatibility of a business relationship. Why that’s the case is yet to be determined.

What makes business partnerships so risky? Here are a few reasons:

Differences in Goals and Objectives: Business partners may have different goals and objectives for the business, which can lead to conflicts and disagreements. Mismanaged Expectations: Business partners are often afraid to have the uncomfortable discussions when forming a business venture regarding their expectations for themselves and their expectations of their business partner. This leads to mismanaged expectations which usually results in tension and then litigation.

Differences in Work Ethic: Partners may have different work ethics and levels of commitment, which can lead to one partner doing more work than the other, creating resentment.

Unequal Contributions: One partner may contribute more to the business, such as providing more funding, resources, or expertise, which can lead to disputes over equity and profit sharing.

Personal Issues: Partnerships can be complicated by personal issues, such as differences in personality, communication style, and values. There are numerous articles on this website addressing the issues discussed here, including one article to assess the partnership compatibility.

Legal and Financial Risks: Partnerships require a legal agreement, which can be complex and costly to create and maintain, but always worth the expense.  Without a written agreement in place your business partnership may be governed by rules that you did not intend for your business. Get it all in writing.

Overall, business partnerships require a significant amount of trust, communication, and alignment between partners to be successful. If these elements are lacking, the partnership can become risky and challenging to navigate.

My opinion: a partnership should be a last resort. You can usually accomplish what you want out of a business partnership by having properly drafting independent contractor agreements, profit sharing plans, loans, limited joint venture agreements, etc.