The Disadvantages of a Partnership When Starting a Company
- August 7th, 2014
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There are different kinds of partnerships to choose from when you’re starting your new business, and while there are many business partnership advantages, it’s important to note the disadvantages of a partnership, too. It’s critical to make sure that you understand all of your options before deciding how to structure your new company.
The Disadvantages of a Partnership
There are many opportunities for rifts to emerge within a partnership. One of the biggest disadvantages of a partnership is the way that profits are shared. When partners have equally shares in their company, it’s expected that they will equally split the amount of time and effort that goes into making the company successful. Unfortunately, that isn’t always the case. Partners will quickly become at odds with one another if one or more of them are doing most of the work, while the others are just sitting back and enjoying the ride.
On the topic of disagreements, partnerships are exposed to an increased risk of discord among decision-makers. In other kinds of businesses, the hierarchical structure for making decisions that affect the company is different, and there’s usually a single person who can make executive decisions, or at least a board of executives who operate under a “majority rules” system. Partners who have equal shares in a company also have equal power to make decisions. This could not only cause disagreements, but could delay important decisions that need to be made while the partners attempt to compromise in order to resolve their disputes.
The way that profits are shared among partners is one of the biggest advantages of partnerships. However, the flip side to that coin is that liability is also equally shared. This is often one of the biggest disadvantages of a partnership. Because the company doesn’t support itself in so far as acting as an independent entity, paying income taxes and being held accountable for liabilities, there’s nothing to shield the partners in the event of a liability dispute. Partners are equally liable for any actions or debts of the company’s, and that can put the partners’ personal assets in jeopardy in order to cover anything for which the company is liable.
While partnerships are often less expensive to establish than corporations, they are more expensive to set up than sole proprietorships. This is because the legal and accounting work is significantly more intricate as you add more partners into the mix. There are more people whose assets will be at stake, and who will need to ensure that they’re being fairly represented in the partnership agreement.
Contact the tax professionals at JRH & Associates at (516) 794-5752 for help with choosing the type of business that’s right for you!