For many starting out in business, a partnership offers attractive advantages; they’re easy to setup, simple and easy to run. However, as with many choices in life, taking the easy road may not necessarily lead to the best outcomes.
While the choice is ultimately yours, there are significant disadvantages to having a partnership that should make you think twice about using this structure for your business.
Liability. The word you never want to hear in relation to your business. If you establish a partnership, you need to be aware of the implications where they relate to your liability for debt acquired by the business or other obligations. In a partnership, there is no legal separation between assets of the business or personal assets – they are one and the same. You and your business partner are jointly and severally liable for any debt or other duties entered into on behalf of the business. No separation between business and personal assets means your personal assets can be drawn on to satisfy debts of the business.
Joint and several liability means that if the business acquires a lot of debts, and your business partner’s assets are much smaller than yours, creditors can pursue your (greater) assets to satisfy their debt.
A raft of other issues can be grouped under the ‘management issues’ that are associated with partnerships in terms of lack of clarity, instability, difficulty in severing partnership ties and uncertainty in accession planning.
In a partnership, there is often a lack of clarity regarding different roles in the business. Who handles what in the business? If a partner contributes more, are they entitled to a greater share of the profits? Do they have a greater say in the direction of the business? Can they get the last word on important business decisions?
What if a partner wishes to leave? Does the other partner buy them out? How much should they be bought out for? What is the value of the business? Should it be a 50/50 split? Can the departing partner find an outsider to take over their share of the business? Is the surviving partner allowed to help choose an outsider who might take over? These are just a few questions that can arise when a partner wants to leave. Unfortunately, in many cases where a partner wishes to leave, these issues can often be complicated by a falling out amongst partners.
Difficulty in obtaining investment funds
Because of the issues identified above with partnerships (instability, management issues and liability), partnerships have difficulty raising funds. Banks and other financial institutions don’t relish lending to risky business propositions – a partnership is the very epitome of a risky proposal. If you want to expand or borrow money to finance the purchase of the latest equipment, you may have difficulty if you only have a partnership established.
Starting your own business is risky enough, without choosing a delicate structure to support it all. Think of your business structure as the foundation of a house – it must be strong to support the bricks and mortar in the house. If you build on a flimsy structure, you may experience difficulty before you even begin. If you need a business structures specialist to assist you, simply get in touch with LegalVision on 1300 544 755.