The High Cost of Poor Business Structuring: Protecting Your Business and Relationships.
This means that one partner’s financial decision can impact everyone, creating the potential for resentment and mistrust if one partner’s actions put others at financial risk.
Starting a business is an exciting venture. Especially when working with friends or family. Who better to open up shop with?
You share a vision, trust, and a common goal. But sometimes your excitement can overshadow one critical detail—choosing the proper business structure. When a business is not set up with a clear, legally sound foundation, it can lead to serious consequences not only for business liability and financial implications but also for the personal relationships involved. Here are some key reasons why proper business structuring is essential:
Maintaining Strong Relationships
When a business isn’t structured properly, the impact on personal relationships between partners can be devastating. Here are some of the biggest ways that improper structuring can strain friendships and partnerships:
Incorrectly Distributing Financial Liability & Risk: Certain business entities, such as a general partnership, require each partner to be personally liable for business debts. This means that one partner’s financial decision can impact everyone, creating the potential for resentment and mistrust if one partner’s actions put others at financial risk.
Example: Two friends open a restaurant as a general partnership. One partner takes out a large loan for renovations without consulting the other. The business experiences a decrease in demand due to an external event like COVID-19. Both partners are personally liable to repay the debt. The strain of the debt and lack of communication damage their friendship and financial stability.
Confusion Over Decision-Making Authority: A lack of structure often results in unclear or inconsistent decision-making processes. Without defined roles spelled out through a formal business structure, partners may clash over major business decisions, creating tension and slowing down growth.
Example: Two partners open a fitness studio without establishing who has decision-making authority. One wants to expand aggressively, while the other prefers a smaller scale. The power struggle intensifies, damaging both the business and their relationship.
Disputes Over Roles, Ownership, and Compensation: It is common for one person to feel overburdened or undercompensated when roles, ownership, or compensation plans are not clearly defined. One person may feel they are working more hours or contributing more capital without receiving sufficient equity in the business or monetary compensation. This can lead to bitterness, resentment, and frustration among the partners.
Example: A couple launches a real estate agency but doesn’t set guidelines for workload and compensation. Over time, one partner feels they’re contributing far more, leading to resentment that eventually spills over into their personal relationship.
Example: Three friends start a tech company as a limited liability company (LLC) but do not define each person’s ownership share or responsibilities to the company. As the company grows, one person feels they’re handling most of the workload and demands a larger share of profits. The disagreement leads to a fallout, disrupting both the business and their friendship.
Lack of Defined Exit Strategy: An exit strategy is essential, especially if partners have different goals. Without a plan in writing for what will happen when one partner wants to leave, the resulting disputes can lead to costly legal battles and fractured relationships.
Example: Two friends open a retail store, but when one wants to leave, the other can’t afford to buy them out. The situation escalates, leading to a lawsuit that permanently damages their friendship.
Financial Benefits
Structuring your business in alignment with your needs and objectives can help you attract external capital while reducing tax liability.
Tax Efficiency: A proper structure can significantly reduce tax burdens by avoiding pitfalls like double taxation or self-employment taxes. Choosing the wrong structure often means higher taxes and fewer deductions, directly impacting cash flow and profitability.
Attracting Investors: Investors favor well-structured businesses because they offer transparency, clear governance, and limited liability—making them less risky investments. Poorly structured businesses may struggle to raise capital, limiting growth potential.
Liability & Risk
Business entities can help reduce personal liability by separating your personal and business assets, while also helping your business build a respected reputation in the marketplace.
Personal Liability Protection: Certain business structures, such as a limited liability company (LLC) or corporation, protect personal assets by legally separating them from business liabilities. Without this protection, personal savings, property, and investments could be at risk if the business faces debt or lawsuits.
Credibility in the Marketplace: Incorporation as a business entity yields credibility to your business as it operates in the marketplace. Potential vendors, clients, and partners will likely see your business as more legitimate and respectable if it operates as a formal business entity—impacting how they approach and do business with you.
Conclusion
Choosing the right structure—such as an LLC, corporation, or partnership—affects almost every aspect of your business, from tax obligations to personal liability. An improper structure exposes your business and personal finances to potential risks and can fuel disputes between partners.
To avoid these pitfalls, consult an attorney early to establish a clear business structure. A lawyer can help you select the best structure and draft essential agreements to cover ownership shares, roles and responsibilities, decision-making authority, and exit strategies. Setting up a business entity properly from the beginning not only protects your business but also safeguards the relationships that make it worthwhile.
Take Action Today!
Don’t let the excitement of starting your business overshadow the critical foundation it needs to thrive. Protect your finances, relationships, and future by choosing the right business structure from the start.
JSB Business Solutions Group is here to help you every step of the way. For personalized assistance, reach out to us at jsbuford@thebufordco.com or call 888.549.9689. You can also schedule an appointment to discuss your needs and ensure your business is set up for success. Let’s work together to secure your vision and protect what matters most!
Take the first step towards elevated performance by scheduling your consultation with JSB Business Solutions. Answer a handful of questions by Clicking this link and schedule a day and time that works best for you.
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