Partnership Disputes and Taxes
I caution every new partnership client that there are 2 big icebergs out there that can sink your business Titanic.
If you are in a partnership, chances are strong that you will enter a dispute. Few business partnerships have the personal warmth that was there at startup after a year or two. Starting a new business takes a lot of work. Few businesses are over the hump after a year but that’s when the partners start to get fatigue. They don’t take enough time off and they usually skip vacation because of time and cost.
As people wear down, they see inequalities with their partner. I often hear things like, “I work more hours than she does” and “I bring all the new ideas to the business”. These are huge danger signs. People don’t make those kinds of statements until they are very frustrated. By the time they call me, things are out of hand. Like the old medical saying goes, left untreated the infection gets worse.
In business partnerships, breakdown of the partner’s relationship is the leading cause of failure. Left untreated, it only gets worse.
The other killer of business partnerships is taxes. There are many dynamics that lead to business failure because of taxes. Having a business with more than one owner feeds into an unbalanced view of taxes. If partners feel they are under compensated, they often resort to squeezing money from the tax bill. There are other reasons that partnerships often fall to tax obligations. There is no point in covering all of reasons it happens, better to get on the solutions.
I can confidently say if a business is having a partnership dispute, it likely has an underlying tax problem.
Can a business be saved once a partnership dispute erupts? Yes. But be careful. The path to resolution can be very expensive. You want to avoid court if possible. There are 2 ways to save a business under a fractured partnership.
- Fair, affordable structured buyout
- Restructure of the business through a clearer partnership agreement
Number 2 can work very well if the situation isn’t too far out of hand. If partners still have some respect for each other, structuring duties, responsibilities and compensation can relieve a lot of tension.
If the partnership must go to a buyout of some kind, it is very important that it be negotiated fairly and practically. All parties must be realistic about the value of the business and what the business can support.
Your business doesn’t have to hit the iceberg. You can set a better, safer course as long as you make the corrections soon enough.