When it comes to business structures, there are the good, the bad and the ugly. Plus the illegal. The ugly entity is a general partnership. Here’s an example of just one thing that can go wrong.
George, Tom and Darrell had been friends for years. They all had businesses themselves and also were at a point in their life where they had money they wanted to invest for their future and their family’s future.
They decided to build a car wash. Building one wasn’t quite as much of a risk as it sounds since all three of the partners worked in the trades. They could build it by pooling their connections and works for a fraction of the cost.
The first one was successful, providing a great return. They saved up some money and built a second. And then a third. They got to the point where they have 5 highly lucrative car washes that made more than they had made before in their other businesses.
They ran the car wash business as a general partnership and they didn’t have an operating agreement. It was all done with a handshake.
Then George got a divorce. Or he and his wife started to get a divorce and years later, they were still slugging it out.
He ended up losing his interest in the general partnership, and that meant Tom and Darrell had a new partner. George’s now ex-wife Stephanie who hated George and all his friends.
She sued them every chance she got, so they began to run the business in a different way. A scared way, like you had to look over your shoulder with every decision you made.
Because that’s what Tom and Darrell had to do.
George got a new wife. A much younger wife and Stephanie went from mad to furious. Plus she was on the quest for revenge and to show George what he was missing out on.
She spent way more money than she had, especially since the car washes’ income had dropped dramatically since George was gone. The creditors got antsy and came after her assets. She made some bad decisions in her role as a general partner of the car wash general partnership, and suddenly the partnership was in even worse trouble.
Since it was a general partnership, Tom and Darrell had no protection from their new partner gone rogue.
In the end, they sold the car washes for a fraction of what they had been worth less than 5 years prior. It was the only way to get rid of Stephanie.
There were several mistakes here. First of all, I never recommend a general partnership for a business, or even for an investment. Second, the partners needed an operating agreement that talked about how to handle all the bad things, and good things, that could happen.
The names are changed here and a few of the circumstances, but the basic story is the same. The wrong structure and lack of an agreement meant a company was lost.
Keep your eye out for “Inc’d” coming early 2022. C Corporations are the playground of the rich. How much could you save if you had one?