Thinking of going into business with a close friend? Think again

There are plenty of reasons not to partner professionally with a buddy, starting with how much you value your friendship

Dear Bob ...

A bunch of us were laid off recently. Two of us worked especially well together prior to the layoff, and we're talking about starting a consulting business together. We figure we trust each others' integrity and ability, we can offer a more more complete set of skills to potential clients, and we can give each other emotional support if the going gets rough.

[ See also: Which MBA specialty should an entrepreneur who wants out pursue? | Get sage advice on IT careers and management from Bob Lewis in InfoWorld's Advice Line newsletter. ]

We're both regular readers of yours, so we agreed to write to get your opinion.

What do you think? What pitfalls aren't we thinking of?

- Potential partner

Dear Pot Part ...

There's an old saying. Partners only fight under two conditions: when they're making money and when they're losing money.

What I suspect you aren't thinking of is everything. When two people form a partnership, it can make sense -- if they're trying to form a large enterprise and need to pool their resources to get it started.

Otherwise, why do it? You can each incorporate as an LLC or S-Corporation and act as partners as much as you want -- through a formal joint operating agreement (JOA) or through a handshake. Either way, you avoid creating a business entity that receives and distributes revenue to its partners and signs up for joint obligations.

Partnerships founder for a few well-known reasons:

  • Each partner fails to value what the other partner provides to the joint venture.
  • The partners disagree on how to handle a situation with a client.
  • One partner is better at selling and doesn't want to share the revenue equally with the partner who isn't as good at landing clients.
  • One partner is better at selling and lands accounts that only have enough work for one partner.
  • One partner is better at delivering results, or expends more effort creating them, and resents the other partner taking an equal share of the revenue anyway.
  • Something goes wrong with a client, and it's the other partner's fault. The other partner figures it's the first partner's fault.

There are others, but these are probably the big ones.

Don't form a legal partnership and you avoid most of them. Whoever lands the account calls the shots. The JOA spells out how much the seller takes off the top, and it defines the other "partner's" role and compensation as a subcontractor. If there isn't enough business for two, no problem -- each of you are running an independent company, with no obligation to put food on each others' tables.

If business thrives to the point where it's desirable to expand, you can always form a partnership then. Until that happens, why risk your friendship on the vagaries of an uncertain business venture?

- Bob