My business partner does not want to participate on the business activities, how should I proceed?

Question

I have started a business together with another partner as an equal in terms of earning and effort. There's no written contract, just a gentlemen's agreement. We are an IT software company, so we don't have too many physical assets, and we do have a few other employees.

Lately he doesn't participate as much anymore in the business activities. Initially, he invoked some family problems but yesterday he confirmed very clearly that he just doesn't feel like 8 hours per day is a reasonable amount of work he should invest in the business. I usually invest about 10-12 hours each day, plus time on the weekends.

So how should I proceed? Is there a good way to make this partnership more equitable, or am I not going to be able to change things?

Answer 1

Have a talk with your partner about it and agree (in writing) how "effort" is evaluated and how earnings are related to effort. Then follow these rules.

If you can't agree on this point, you'll have to part ways, better sooner than later. If the company is only two of you, and there's not many assets in the business, you'll have no problem to restart exactly the same business with someone else.

Answer 2

There are a few different options you should consider, depending on your assessment of the situation:

1. The family issues are real - support your colleague through a troubled period. If the challenges your partner is facing outside of the venture are real, be patient and caring toward your colleague. Part of having a partner is being able to lean on him/her when needed. Your partner needs some help until the trouble passes.

2. The family issues are made-up, but your partner still has an ownership mindset - address the lying and consider updating your agreement. Lying is never acceptable, but it doesn't mean your partner doesn't care about the venture. If you're both still dedicated to growing the business, consider adjusting the partnership agreement to reflect the different amount of time spent.

3. Your partner has lost interest - it's time to break up. A disinterested partner, or an owner who doesn't act like one is likely to become a persistent drag on the business. If you can find a path to an amicable break-up, do it sooner rather than later.

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With regard to (2), you might want to explore some other partnership agreements to see how they are structured. At least, you should be aware that:

• Partnership agreements (charter, articles of incorporation, etc.) can always be changed, usually for free when all partners agree.
• Ownership interest, financial interest, and decision interest are all separate quantities to be distributed in an agreement. 50/50 ownership doesn't automatically mean 50/50 split of the profits. Each quantity can be assigned separately and variably.
• Interests are typically assigned through vesting in early ventures. Instead of assigning interests upfront, individuals earn them by meeting milestones or putting in hours - even in 2-person ventures.
• The default agreements available from incorporating authorities are universally poor. Find a lawyer that specializes in new ventures or small business to create a well-functioning agreement for your business specifically if you haven't already.

I wish the best for both you and your partner, regardless of whether you continue in the venture together or part ways.

Answer 3

Ask your "partner" if he is willing to give you his shares of the business (for a price probably), then you can manage your business as you see fit, and don't have to worry about either your partner's performance nor about killing the business you want to keep alive.

And you would save your employee's jobs in the process, too.

Answer 4

The mistake that you made was that you didn’t choose your business partner careful enough.

At some point money needs to be paid, either salaries or dividends. It is quite likely that paying most money through dividends would be a lot more tax efficient, but that puts you in a very bad position.

Here’s what I would do: suggest that salaries are paid at a good market rate according to the useful work done for the business. His salary would be quite small compared to yours. If the business can’t pay these salaries, then both owners must invest additional money in equal amounts. Alternatively, you buy his share. Alternatively, you stop working, you wind the company down, and each gets back what remains of their investment.

Going into business with the wrong partner sucks.