To set the record straight, I’m certainly not an attorney, nor am I in the business of dispensing legal advice. But as someone who’s been involved in – and burned by – a couple of partnership ventures gone sour, I do have opinions. I’d like to share those with you here if you’ll let me.
Most would-be partners see themselves going into business with friends or family members. Many times those involved have known each other for years. But knowing someone for a long time is not the same as knowing them well. At least not well enough to become partners with them. But that’s only the first drawback.
Drawback #2: Many would-be partners believe they can put a deal together with little more than a verbal agreement and a hand shake. Wrong! The only safe way to do it, if do it you must, is with a detailed written Partnership Agreement. One drawn up by an impartial attorney all partners agree on.
Drawback #3: Even before you get to that point, you should know that partners can be held jointly and severably liable for the obligations of the partnership. Simply put, that means either or all of you may be liable for all the liabilities of your business. Everything from accounts payable to judgments against the business, including obligations for which you as an individual may not be responsible at all.
That could wipe out some or all of the personal assets of each of the partners. But let me paint you a worse case scenario. Drawback #4: Partner A has only modest means, a simple home and car, along with a spouse and children. Partner B is extremely wealthy. Large home, fancy car, summer place, stocks, bonds, IRAs, the works.
Their business goes belly up for some reason, leaving behind huge financial liabilities and other obligations. Creditors take the partners to court in an effort to collect. A multi-million dollar judgment is rendered in favor of the creditors, and the court lays claim to the assets of the partners.
Partner A can lose his simple home and car, but once their gone he has nothing more the court can lay claim to. So they turn to Partner B to collect the balance of that multi-million dollar judgment. And to satisfy that judgment the court sells off his large home, fancy car, summer place, stocks, bonds, etc.
They might have been “equal partners,” but there’s nothing equal about what they stand to lose. If only because partners can be held personally liable for the obligations of their business – jointly and severably, meaning individually and collectively – I suggest you think long and hard before becoming involved in a partnership arrangement, even one spelled out in writing.