To be honest, we started at just the right time in a growing niche and money was easy for a while. We have a lot of competitors now and technology has changed a lot.
Hope that answers your questions.
I see you saying that you're concerned the situation may be past the point of repair. But the only real concrete problem I see is that you disagree about a designer. That is not one of the all-time great reasons to dissolve a partnership.
† Not a criticism.
Lack of growth is not really the fault of a single person. And your partner has emotional reasons not to want to fire this guy. Either view the designer as a temporary cost of supporting your partner, or figure out a way to train the guy into greater competence in his role. At a minimum, it sounds like you'll have to be the bearer of bad news if you let him go. Do you have a way to do this and save your partner face?
Tip: deal with all conflict with your partner face-to-face instead of over email. That will avoid people reading passive aggressiveness and latent hostility into communications -- both you and him.
It would be rather simple to set up a list of skills this guy is going to be required to get versed in to actually execute his job rather than be a resource black hole. If this guy can't get versed then there's clear reasoning to let him go and save your partner face. It's not being cruel or unkind in anyway, it's simply requiring him to do the actual job he was wanted for.
You could always be exceptionally mean and just force this guy to quit, but he'd likely do a lot of collateral damage on the way out.
In hindsight, I should have just fired the designer. But I was trying to be a good partner and go to him with my issues first. He agreed and said he would take care of it.
I think I've downplayed how much power he's given this person. Not just design of marketing stuff, but actual product UI design. Plus a lot marketing/budgeting decisions, etc. Basically this person has become or directed the entire face of our company. For whatever reason, despite no sales growth, my partner hangs on and defends this person's every decision.
If it matters, I'll add that this person is a woman. My partner has assured me that they are not in a romantic relationship and have simply become extremely close friends. I believe him–but many people on the outside get the impression they are romantically involved.
* Hire another product lead to manage the front-end of the project.
* Convince your partner it's time to seek outside funding to scale the business.
* Hire a VP/Marketing, VP/Engineering, or VP/Sales to add a stakeholder who will be objective and put pressure on your team not to make dumb decisions.
* Convince your partner to add a minority partner, splitting the equity cost equally between the two of you, so that you can have another person who is fully focused on the business (and, don't say this to your partner, to break ties).
* Hire a mediator to hear you and your partner out and agree beforehand that you're going to abide by their decisions.
* Wait it out. For ~3 years or so your partner managed the business, kept things organized, got people paid, did sales at least as well as you did, and generally made up for all the gaps you (like everyone else) had. When things calm down with his personal life, maybe everything will be fine again.
And given the work dimension, people tend to deny such things, and rationalize denial as being an entirely private and separate matter (even when it isn't). So while I regret feeding such suspicions, they're evident in your own word choices, and could explain the otherwise perplexing loyalty you report.
But why bother? It's probably not. The guy's partner: not so great at hiring, and not so great at firing. Firing in particular is very hard to do, and if you already weren't managing the role you need to fire properly (his team wasn't), it's next to impossible. These weaknesses describe 60% of all entrepreneurs, including a small chunk of the successful ones. Work the problem.
Also, when he said his partner is getting divorced... hey, 20-somethings on HN? That's a big deal. Extremely stressful. I'm not saying, "cut the guy slack out of empathy". I'm saying not cutting him slack might be a dumb business move.