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Business
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Co-ownership, in whatever legal form it might take, always presents an additional type of risk to a business venture - the risk that the personal relationship will fail, which is completely separate from the risk that the business concept will fail. (In this article, all forms of business co-ownership are referred to as "partnerships", whether they are corporations, limited liability companies, partnerships, etc.) Too often, people engage in partnerships without adequately considering the many issues involved in the relationship - sometimes to their personal detriment. Although nothing can fully eliminate the risks inherent in partnerships, you can enhance the chances of partnership success by respecting the following four rules.
I don't mean to suggest that you should never join in a business partnership. But I cannot overemphasize the significance of entering into such arrangements. This is particularly so when the arrangement calls for a significant personal commitment or a large financial investment. All business ventures present the possibility of loss rather than gain. In partnerships, however, the performance of the business will be impacted by the effectiveness (or ineffectiveness) of the partners' personal relationships, thus adding an extra dimension of risk not associated with solo ventures. Unfortunately, many partnerships do unravel. And as the personal relationships breakdown, the associated businesses frequently are pulled down with them. This history should not prevent people from pursuing partnerships in appropriate situations, but it should caution them to carefully consider whether any proposed partnership really is desirable.
All partnership relationships pose challenges, but the challenges increase exponentially as the number of partners increases. Two partners generally work together better than three; three better than four; and so on. But reasons such as friendship, pre-existing relationships, mutual enthusiasm, etc., often encourage unnecessarily large groups to band together to pursue business opportunities that would be better pursued by a smaller group. To offset this tendency to involve too many people in a new business, always consider at the outset whether the proposed partnership has the fewest partners really needed. Also, avoid adding partners just because they are "friends" or because it feels like the right thing to do. Many friendships have been ruined by failed partnership experiences. One way to control the number of partners is to determine up front whether or not each proposed partner brings to the business something indispensable that cannot be obtained in a better and less expensive way. For example, skills that can easily be hired when needed are not indispensable contributions that justify an additional partner. [On a related point, get adequate assurance from each partner that he or she can and will actually deliver the specific contributions expected (for example, skills, labor, money, property, credit, clients, vendors, connections, etc.).]
This is the hardest rule to follow, but it really must be done if the partnership relationship is to succeed (other than by accident). To determine compatibility, each prospective partners first needs to perform an honest self-analysis to determine exactly what he or she wants to achieve and receive from the partnership experience. This includes considering the respective roles and responsibilities of the partners. Following this self-analysis, the partners should share and jointly review their findings to determine whether they have mutually compatible personal goals and expectations with regard to the proposed business relationship. Although this process may sound pretty easy, it usually isn't. Many people find it hard to identify and articulate their personal goals and how those goals relate to, and will be affected by, the business and the partnership relationship. Similarly, many people find it hard to engage in the frank and candid discussions needed to determine whether prospective partners really share compatible goals and expectations. Sometimes prospective partners identify one mutual goal, such as a desire for financial success, and assume that this is a sufficient basis upon which they can build their partnership. They often fail, however, to consider important issues such as roles, work habits, ethical sensibilities, risk tolerances, etc., that will more likely determine the success or failure of their relationship. Unless the prospective partners have had extensive prior experience with partnership relationships, outside assistance should be considered when evaluating a potential partnership. Prospective partners can also make the mistake of assuming either (i) that they are completely adaptable and will thrive regardless of how the business may develop, or (ii) that the business will inevitably unfold exactly as they expect it to (meaning consistent with their personal goals, whatever those may be). Both of these assumptions may be very wrong. Many people find through experience that they are not as adaptable as they previously thought they were. They come to realize, instead, that they desire, and will only be satisfied with, certain fairly specific outcomes. In addition, new businesses rarely develop as planned. As a result, narrowly defined goals can easily be frustrated, especially if one's partners are trying to achieve a different set of goals. In summary, it is imperative that all prospective partners be as honest as possible with themselves and with each other about what they want out of the business and the partnership relationship. If compatibility appears to exist, that's great. But if compatibility appears to be missing, it is best to have found that out before making regrettable and irreversible commitments.
Memory is a strange thing. We remember the things we want or need to remember. And we remember the past as we want or need the past to be. Without any ill intent, partners can develop conflicting memories of the terms of their relationship, which can lead to all kinds of trouble. For this reason and others, partners should always memorialize the terms of their arrangement in a written document. Besides creating a written record, this exercise forces partners to clarify and articulate previously unexplored terms of their relationship. When documenting the terms of a partnership arrangement, the issues of personal expectations, roles, and obligations should be carefully addressed. These kinds of issues are frequently the basis of personal frustrations that, in turn, can damage the partnership relationship and undermine the business venture. (Remember the rule regarding partner compatibility.) Please note that this article is intended only to address certain business-planning and personal goals aspects of business partnerships. However, partnerships also create important legal rights and obligations for the partners and the business entity. People considering the co-ownership of a business are advised to engage legal counsel for guidance on the various legal issues involved. These legal issues may impact the terms of the business relationship and how the partnership relationship is documented.
Although nothing can guarantee a successful partnership relationship, the above rules can help you minimize some of the risks associated with any partnerships you may consider.
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