Virtual Kollage: The disadvantages of partnership

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The disadvantages of partnership

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THE DISADVANTAGES OF PARTNERSHIP
Definition

Partnership describes a business organization in which two or more persons agree to come together to set up and manage the business unit. In a partnership these individuals consent to put their resources together in forming the company. The resources of people who enter into a partnership business usually will include both financial and managerial. It means that not only have the partners agreed to invest their money into the business, they also take up some roles in managing the company, in other words they may decide to manage the company jointly.  Individuals who own a partnership business organization therefore share in both the profit and the risks in case of a loss.

DISADVANTAGES OF PARTNERSHIP
There is a greater tendency for disagreements
One most obvious thing about a partnership business is the likelihood of disagreements among partners. Usually people are likely to have different views on how the business must be run, who is expected to do what and what should be in the best interest of the business. These differences may result in deep divisions among the owners of the business. To avoid some of these problems a deed of partnership must be drafted at the time of forming a partnership. A deed of partnership clarifies procedures that must be followed in case of disagreement and specifies what happens when the business is dissolved.

There is often the need to reach agreement on every business decision
Due to the fact that partnership is jointly managed by its owners, it is often necessary to obtain the consent of all partners regarding how things are done in the business. This means that in situations where a quick decision is needed to take opportunity of a business situation, the partnership business may not benefit from such opportunity. This would not be the case for a sole proprietor. However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders).

The liability of owner of the business is unlimited
Usually, liabilities of the partners in a Partnerships business are unlimited. This means that each partner shares in the financial risk of the business. Where the business makes losses and incurs debt, the assets of the partners may be sold to offset the debt. This can be unattractive for some people who may wish to join the business as partners. The problem can be solved by forming a limited liability where the liability of the business owners is limited only to the amount they invest in the business; while still taking advantage from some of the flexibilities offered by a partnership.

Taxation
A key disadvantages of partnership is that partners must pay tax in much the same way as sole traders, each submitting a Self-Assessment tax return each year. The partners must also register as self-employed with tax authorities. Where it is deemed that the partnership business and the partners are making profit beyond a certain level then they must pay made to pay more tax. This would not be the case for a limited liability company to which the tax laws are usually more favourable.  

Possible Conflict over 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.

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