Disadvantages of a Partnership
1) Unlimited liability:
A major downside of the partnership form of organization is the extent of the personal liability of each partner.
As a general partner, the scope of your legal responsibility is broad; it extends beyond just your own actions.
Each partner may be personally liable for:
- All the debts of the partnership.
- Negligent and wrongful acts (torts) committed by employees and each of the other partners in the scope of partnership business.
2) Accounting and legal costs:
Accounting:
- A partnership involves complex accounting.
- For example, keeping tract of each partner's interest and tax basis in the partnership.
- Let an accounting service handle all the number crunching; it's worth it.
- Your time is better spent doing what you do best, building your business!
Legal:
Legal services will cost money. Avoiding these costs is not always possible or even prudent.
For example, although not legally required, it would still be wise to have a partnership agreement prepared. Using an attorney to prepare the agreement makes sense.
In addition, if a partner sells his interest in the partnership or dies, an attorney will ensure that legal-related issues are handled properly.
3) Recruitment of employees:
Because of the extended liability of each partner (being liable for the actions of employees and other partners), a more judicious approach to the selection of partners and employees will be necessary.
Consequently, professional recruitment services may be needed or some kind of screening process (background checks, etc.). This is another cost to you business.
4) Continuity of life not assured:
A partnership may be dissolved by the acts of the partners. For example, if a partner sells his interest, or dies, the partnership generally ceases to exist.
When a partnership ceases to exist, it must go through a winding up process. This will cost some money.
If a new partnership is established, new business bank accounts will have to opened, a new set of books will be set up, your promotional materials and business stationery will have to be changed showing the new partnership name.