Avoiding Bad Business Partnerships

As an attorney, I probably see a larger proportion of business partnerships end up in litigation or dissolution.  It seems like a lot of business partnerships end up not working well.  Even those among friends or family are plagued with problems.  This is probably because there is no way to resolve a deadlock when 50/50 partners do not agree on the direction of the company.  Just like in a marriage, the partners may feel stifled and not able to move forward when a major disagreement arises. Sometimes these minor disagreements become major disagreements.  This seems to happen quite often when a partner runs out of money, has a divorce or starts drinking excessively.  If a company is a partnership and selling a product under a trademark, the trademark is only owned in gross, and cannot be separated.  Trademarks by definition define a single source of goods.  The trademark could therefore only be used by consent of both partners. This leads to another potential for business interruption.  

Unequal partnerships are no better.  If 50% ownership leads to headaches, less than 51% ownership is worse as it seems to always devolve into 0% ownership.  Limited partnerships also do not work out well.  Limited partnerships usually involve the stealing of limited partners' money by general partners.  Limited partners have little recourse against general partners especially when general partners are judgment proof and have their money outside of the United States.  General partners can steal money by making high-interest loans, mortgaging assets, paying for expensive consultants that are shell companies owned by the general partners and sometimes simply wiring money out of the United States.  Courts generally do not protect the rights of limited partners who have had their money stolen. The limited partners often go back to court to try to collect on assets that are located in shell companies. By the time the court system can act, the money in the shell companies have already moved around. Sometimes the shell companies move outside of United States jurisdiction.  Courts make it troublesome and a hassle to appoint a receiver.  Courts routinely deny relief to creditors.  

Probably the worst thing to do is to buy land with several partners.  Land requires payment of taxes, and when partners have to pay taxes equally, one partner will stop paying taxes and leave the responsibility to the other partners. The other partners will deduct that partners share, leading to strife. The strife will lead other partners to stop paying their taxes. This will lead to only one or two partners paying taxes.  Oftentimes there are other special assessments involved besides taxes. Sometimes the land needs to be maintained or cleaned up such as before a sale or development.  

Land partnership is not the only problem however.  Even in law firm partnerships, one partner can commit malpractice leading to  all partners in the law firm suffering.  Contractors that have partners, might not pay their taxes like payroll taxes and this could lead to bankruptcy of all partners involved.

When general partners breach their fiduciary duty by embezzling money, the criminal process does not get involved.  The authorities will say that it is a civil matter.  Litigation is expensive, and in states like California very slow especially with all of the court closures due to budget cuts.  Obtaining a judgment against a general partner is typically useless.  Even if criminal penalties are applied, the penalty is relatively light.  Engaging in bank fraud for example typically only leads to about six months of jail time tops, even if something like $4 million is stolen.  Criminal sentences for breach of fiduciary duty, conversion and fraud are typically so short and lenient that they have negligible deterrence value.  

The legal system does not effectively adjudicate disputes between insolvent parties.  Considering that wealth is ever more concentrated in a smaller number of people, a larger majority of the population in the United States is judgment proof and should not form business partnerships with each other.  Business partnerships such as general partnerships and limited partnerships simply don't make sense since the person with checkbook control can take all the money and divert it away with one check.  Suing the embezzler leads the embezzler to divert funds to the embezzler's wife, children, cousins and other relatives that may or may not keep their assets within the jurisdiction of any United States Court.  

A long time ago, a physician friend of my family drew up his own limited partnership document by copying a form agreement so that he could save $500 instead of going to see an attorney to get a legal opinion regarding its deficiencies.  He trusted the general partner to take care of his money, and ended up losing about $10 million back in 1991.  It seems odd to me that people become enthusiastic and jump into business partnerships oftentimes without any legal counsel.  There really doesn't seem to be anyway to get general partnerships and limited partnerships to work.  The law is complicated, the court system is incompetent, and so people's trust is not honored.  

Some business partnerships have multiple partners stealing money. These business partnerships look more like embezzlement contests.  Once the civil lawsuit is filed, each partner tends to keep whatever they had taken.  

There really doesn't seem to be anyway to get general partnerships and limited partnerships to work.  The law is complicated, the court system is unresponsive, and this oftentimes leads to ultimate resolution in the form of violence and murder which we see on the news once in a while.  Because of all of these problems with business partnerships, I would not risk much money or time in one.  It is much easier to deal with a business venture when one person has 100% control and ownership. There is no potential for squabbling, embezzlement and litigation when only one person is in charge.  Perhaps I have seen too many partnership failures.

Partnerships are very difficult to maintain long-term, perhaps more so than marriages.  It seems like successful partners must be very good friends first and enjoy each other's company outside of the context of the business venture.  This would make the essence of the partnership greater than the business venture the partners embark on.  

If I have missed any pitfalls in establishing partnerships, please let me know.