Business Structure Series: Partnership Disadvantages

Are you launching a new business? Understanding the different business structures available will better position you to choose one that manages your risks, protects your assets, limits your liability and enables your business to grow. This week, we consider the advantages and disadvantages of running your business through a partnership.

What is a Partnership?

As discussed in an earlier article in this series (Business Structure Series: Partnership Advantages), we defined a Partnership as an association of people or entities running a business together, but not as a company. Partners jointly own the business’ assets and jointly share the profits and losses. Each partner is also entirely responsible for all debts and liabilities incurred by the other partners.

What are the Disadvantages?

Disadvantages to running a business as a partnership include:

• Disputes: When running your business as a partnership, the potential for disputes is ever present especially regarding profit sharing, administrative control and business strategy. However, having a clear and detailed partnership agreement in place should help limit any potential disputes.
• Liability: The partners will be jointly and severally liable for all debts incurred by the partners. This means that if the business fails and one partner cannot afford to pay his or her share of any debts incurred, the other partners will be responsible for the shortfall. Furthermore, a partner is also jointly responsible for any debts its partners incur in relation to the business regardless of whether it had knowledge of such.
• Asset protection: As a partner, your liability for the business’ debts is unlimited. As such, your personal assets are at risk to settle the business’ debts.
• Agency: Each partner is an agent of the partnership and is liable for the actions of other partners.
• Change of ownership: A change in ownership can be difficult. You will have to value the partnership’s assets, and this can be costly. You will most likely need to establish a new partnership between the partners.
• Additional laws and obligations: Some additional laws and regulations govern how partnerships can operate, and these can increase compliance obligations.

Conclusion

As discussed earlier in our series, there are clear advantages to running your business as a partnership. It is an attractive business structure if you want a simple and relatively cheap way of sharing control, resources, responsibilities and profits with a small trusted group of people. There are, however, disadvantages to running your business through this structure, particularly concerning liability and asset protection.

Questions? Please get in touch with LegalVision’s experienced business structuring experts. We would be delighted to assist you in setting up the best business structure to suit your needs.