What Are the Disadvantages of Partnerships?

When small business owners team up to start a business, they might start a business partnership. Besides sole proprietorships, partnerships are the simplest type of business entity. This business structure means that two or more people own the business together.  Each business partner contributes different skill sets and work ethics, which can create a successful partnership. But, partnerships also have disadvantages.

While entrepreneurs might see the advantages of a partnership, like sharing the startup costs and having someone to share decision-making with, they should also consider the disadvantages of a business partnership. Creating a business plan can help, but unexpected problems can arise.

This article details some of the most notable disadvantages of partnership business structures.

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Liability in Partnerships

In a general partnership, every business partner is responsible for the business debts. This means if the business doesn’t have enough money to pay back what it owes, individual partners are responsible for the debts of the partnership. This is called personal liability.

Even if one general partner makes a mistake, all partners could be accountable. If someone sues the business, partners’ personal assets like houses and savings could be at risk. 

A general partnership is one of the types of partnerships. There are also limited partnerships (LPs), limited liability partnerships (LLPs), or limited liability limited partnerships (LLLPs). Some of these offer liability protection. Small business owners in a general partnership are liable for debts of their business operations.

Transferability in Partnerships

If a business partner wants to leave or sell their part of the business, it’s not always easy. Unlike shares in a corporation that you can often sell to anyone, partner shares in a partnership structure need the other partners’ consent. Absent an agreement to the contrary, the default rule in partnerships is that one person’s stake cannot be transferred to another without prior consent from all of the remaining partners. 

This inflexibility is especially undesirable when the parties have existing disagreements, making having an exit strategy very difficult. If a partner passes away or just wants out, the partnership might have to end if they didn’t plan for what to do in their business plan. That’s why it’s important to talk to a lawyer and set these things up when the partnership starts. If not, finding a new partner or transferring ownership can get complicated.

Instability in Partnerships

Business partnerships can sometimes be shaky. When partners don’t agree on decision-making or the management of the business, it can cause disagreements. If one person isn’t pulling their weight or their work-life balance isn’t right, it can affect the whole business.

Plus, if a business partnership doesn’t have a clear process for handling issues when someone wants to leave or when bringing in a new partner, it can create instability. In a small business, stability is extremely important.

Unclear Authority in Partnerships

Another drawback of informal partnerships is the potential vagueness of each person’s responsibilities. This can apply to both those in the partnership and to those outside of the arrangement. A traditional partnership is an equal stake with equal authority distributed between the members. There is no hierarchy of authority.

To third parties, this means that all partners act on behalf of the partnership. They can enter into contracts and bind the partnership into unwanted agreements.

Even with a partnership’s limitations, this business structure still might prove to be a superior option for many due to its flexibility and informality. Many of the limitations can be addressed with a carefully drawn partnership agreement. Many seeking a partnership structure also consider a limited liability company, which has the characteristics of a partnership, but as its own legal entity, offers liability protection to the member of the LLC.

See FindLaw’s Partnerships and Choosing a Legal Structure sections for more articles and useful resources.

Get Legal Help With Your Partnership Questions

Whether you plan to form your company as a partnership, LLC, incorporation, or different type of legal structure, you should understand the advantages and disadvantages of each. The specific disadvantages of a partnership can also depend on the type of partnership you form.

If you’re operating an existing company or launching a new business, you may want to consult a business attorney for legal advice. An experienced attorney can advise you on liability, tax returns, partnership agreements, and other complicated legal aspects of your business. Professional legal help can answer your immediate questions as well as help you avoid potential issues in the future.