Disadvantages

~The partners are still liable to the full limit of their personal wealth for all the debts of the business. Thus if one partner has a spendthrift nature, and takes on financial responsibilities which the other partners would hesitate about, they are liable for the debts he incurs,

~Problems arise on the death of a partner. A well-established firm may suddenly find that a senior partner dies. Not only is his/her skill and expertise lost, but the heirs may not wish to continue in the business, and may wish to withdraw the capital. For this reason partners frequently take out life assurance on one another. When a partner dies the life assurance policy provides compensation to enable the partner’s heirs to be paid without the firm being sold to raise the money.1

~Unlimited liability of at least one partner. At least one member of every partnership must be a general partner. The general partner has unlimited personal liability.

~Capital accumulation. Although the partnership form of ownership is superior to the proprietorship to attract capital, it is generally not as effective as the corporate form of ownership, which can raise capital by selling shares of ownership to outside investors.

~Difficulty in disposing of partnership interest without dissolving the partnership. Most partnership agreements restrict how partners can dispose of their shares of the business. Often, a partner is required to sell his or her interest to the remaining partner. Even if the original agreement contains such a requirement and clearly delineates how the value of each partner’s ownership will be determined, there is no guarantee that other partners will have the financial resources to buy the seller’s interest.

~If a partner withdraws from the partnership, the partnership ceases to exist unless there are specific provisions in the partnership agreement for a smooth transition.

~Lack of continuity. If one partner dies, significant complications arise. Partnership interest is often nontransferable through inheritance because remaining partners may not want to be in a partnership with the person who inherits the deceased partner’s interest. Partners can make provisions in the partnership agreement to avoid dissolution due to death only if all parties agree to accept as partners those who inherit the deceased’s interest.

~Potential for personality and authority conflicts. Being in a partnership is much like being married. Making sure partners’ work habits, goals, ethics, and general business philosophy are compatible is an important step in avoiding a nasty business divorce. Still, as in a marriage, friction among partners is inevitable and can be difficult to control. The key is having a mechanism such as a partnership agreement and open lines of to interpersonal conflicts and the lack of a partnership agreement for resolving those conflicts. Consider how much conflicts could be created when there is a fundamental difference of opinion between partners on one or more critical business decisions.

~Partners are bound by the law of agency. A partner is like a spouse in that decisions made by one, in that decisions made by one, in the name of the partnership, bind all. Each partner is an agent for the business and can legally bind the other partners to a business agreement. Because of this agency power, all partners must exercise good faith and reasonable care in performing their responsibilities. Some partnerships survive a lifetime. In a general partnership, the continued exposure to personal liability for partnerships actions can wear an entrepreneur down. Knowing that they could lose their personal assets because of a partner’s bad business decision is a fact of life in partnerships. Conflicts between or among partners could force a business to close. Few partnerships ever put into place a mutually agreed upon means for conflict resolution. The result is that disagreement can escalate to the point where the partnership is dissolved and the business ceases to operate.2

~Voluntary withdrawal by a partner from the firm or the death of a member of the firm can cause the partnership to dissolve to be restructured. This presents partnerships with a continuity problem, similar to the one proprietorships experience.3

1 Business Studies (Second Edition) – Geoffrey Whitehead

Butterworth-Heinemann Ltd (1994) P.88

2 Effective Small Business Management : an entrepreneurial approach (Seventh Edition) - Norman M. Scarborough, Thomas W. Zimmerer

Upper Saddle River, N.J. : Prentice Hall (2003) P.76-77

3 Economics (Sixth Edition) - Roger A. Arnold

Australia : Thomson/South-Western (2004) P.483

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