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Why partnerships are a bad idea (for a small business)

I meet a lot of SCORE clients who formed small business partnerships with friends, relatives, acquaintances, and have no idea of the risks they’ve taken on.  They come to SCORE for help because something’s gone wrong, and it’s often too late to fix.  So, I’ve started preaching in my workshops about the dangers of general partnerships for the average small business owner.  Here’s an example I frequently use:

Let’s say you and your best friend Rose decide to form a catering business.  Rose has been out of work for months and has no assets or savings, but she’s a great cook and willing to work hard.  You have a house, a car, and about $20,000 in savings you’re willing to put into the business.  You form a 50-50% general partnership thinking you’ll just decide everything together because you’re such good friends.  You don’t have much money for ads, but you know how to use Twitter and Facebook, and through word-of-mouth you start to get some customers.

On the very first day of business, Rose is driving to a catering event in the company van.  She’s late, she’s rushing, she’s distracted by a text message telling her she forgot to take the shrimp out of the cooler and in her distracted state she runs a stop sign, causing a terrible accident with an oncoming car.  Rose is fine, but the driver of the other vehicle is badly injured.  The good news is, you have auto liability insurance, but the bad news is it has a limit of $1 million.  The other driver sues for $2 million and wins.  Who pays the judgment, and how much does she pay? Read more