Business Partnership Disadvantages free essay sample

However, if your partners cannot pay, you may be called upon to pay all the debts even if you must sell off all your possessions to do so. This makes partnerships too risky for most situations. The answer would be a different business structure. Disadvantages of Partnership * Disagreements –  One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved. * Agreement –  Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are less freedoms with regards to the management of the business. Especially compared to sole traders. However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders). * Liability –  Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. Which can be off putting for some people. This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model. Taxation –  One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a  Self Assessment  tax return each year. They are also required to register as self employed with HM Revenue amp; Customs. The current laws mean that if the partnership (and the partners) bring in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company. This means that in most cases setting up a limited company would be more beneficial as the taxation laws are more favourable (see our article on the  Advantages and Disadvantages of a Limited Company). * Profit Sharing –  Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards. - Liability Each partner is liable for the actions of all the other partners in a general partnership, and this includes the payment of debts incurred by the partnership. If a partnership is sued, for example, all of the partners are personally liable to pay the judgment. In a limited partnership, only one partner, the general partner, is liable, but the other partners cannot be involved in the running of the business. A limited liability partnership does absolve the individual partners of full liability, but it requires state registration. Disadvantages of Partnership * There is unlimited liability: All the partners are responsible for the  debts  of the firm and if the business goes bankrupt, all the partners ill have to clear the debts even if they have to sell of their personal belongings. * Disagreement among the partners can lead to problems for the business. * There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit. * There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankr upt. A major disadvantage of doing business as a general partnership is that all partners are personally liable for business debts and liabilities (for example, a judgment in a lawsuit). While its true that a good insurance policy can do much to reduce lawsuit worries and that many small, savvy businesses dont have debt problems, its also true that businesses which face significant risks in either of these areas should probably organize themselves as a corporation or LLC. Believing that two people can start a business together just because one person can start a business successfully is truly a misconception. Never think that just because he or she succeeded we can too. Having 2 people working together does not mean that the task will be completed better and faster or the amount of risk is lower. Sometimes people do not see eye to eye and have different goals for themselves. These differences can sometimes lead to incompatibility. Starting a business with a partner has a few disadvantages. Decision making is a reason not to begin a business with a partner. If both parties agree the decisions have equal weight then disagreements are bound to occur as to what the next course of action will be. It leads to a war of two worlds. Finances are another reason why business partnerships are not recommended. As you already know, it takes time to start making a profit. The longer the business exists with no profit the better the chances the business will collapse. When the business is in difficulty with a partner involved the time to bring the business out of the red is increased. The next disadvantage involves the work ethics of the two individuals who are operating the business entity. Disagreements are sure to occur causing problems with the decision making within the business. The business will not succeed if one partner is working more than the other. Inability to get along in a business can hurt a friendship if the two individuals shared a friendship in the past. The fourth reason not to opt for a partnership business institution is the fact that the long-term and short term goals vary amongst all people. Each person has a different viewpoint as what he or she would like to attain in their business. Their opinions are very different therefore this leads to a clash of the minds. The answer to the question What do you want out of it? varies from person to person. One individual may want to make it a living to support his or her family while another may go into a partnership business only to prove that he or she can be successful. Both individuals are striving to reach unique goals. The final disadvantage is related to trust. Is the person whom you are in business with worthy of entrusting your belongings? Trust is a very important factor and this is what has been done. The liabilities are shared. When one partnership party has liabilities they automatically become the liabilities of the second party. If for some reason the partner leaves and required payment are not taken care of, the full responsibility falls on the remaining partner. This can sometimes lead to financial burden for the business especially near start up when the business hasnt taken off yet. Starting a business requires a large amount of funding and can be stressful. Dont add difficulty as well into the endeavor. Starting a partnership type business with a friend or relative is not recommended in light of the difficulties and disadvantages of partnership type businesses. Unlimited liability: All the partners are jointly liable for the debt of the firm. They can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties depending on the arrangement made between the partners. Uncertain life: The partnership firm has no legal existance separate from it’s partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership. Lack of harmony: In a partnership firm every partner has an equal right to participate in the management. Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this, sometimes there is a possibility of friction and discontent among the partners. Difference of opinion may lead to the end of the parnership and the business. Limited capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form. No transferability of share: If you are a partner in any firm, you cannot transfer your share or part of the company to outsiders, without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others. While partnerships are the simplest and most common form of business arrangements, they have their own set of disadvantages as well. The informality of the relationship means that there are fewer protections for the parties to the agreement, including a lack of limits on liability, difficulties transferring an ownership stake, and potentially unclear roles and authority. Liability Generally, the members of a partnership are exposed to unlimited liability for the acts of the partnership as a whole. This means that if the business as a whole becomes indebted and insolvent, the partners personal assets might be exposed to cover the debts. Of course, this shortcoming can be addressed by forming a partnership between two corporations. Corporations  have limited liability and can be partners in a partnership as well. Transferability Absent an agreement to the contrary, the default rule in partnerships is that one persons 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. Instability On similar lines, by default, a partnership is dissolved as soon as one of the members dies, retires, resigns, files for bankruptcy, or otherwise quits. This can mean a sudden and unexpected end to a profitable business. A corporation, on the other hand, requires many more steps to be undertaken in order to end its existence, which makes its existence much more predictable. Unclear Authority Another drawback of informal partnerships is the potential vagueness of each persons responsibilities, both to 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, can enter into contracts, and by the same token, bind the partnership into unwanted agreements. Even with a partnerships limitations, it 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  or by adopting an alternative business entity, such as a  limited liability company.