Partnership Advantages and Disadvantages

Partnerships are a standard business structure where two or more individuals come together to run a business. While partnerships can offer several benefits, there are also potential drawbacks to consider before entering this type of legal and financial arrangement. By understanding partnership advantages and disadvantages, you can decide whether this type of business structure is right for you. If you want to learn more about partnership pros and cons, please consider scheduling a consultation with the experienced Arizona business attorneys at Harrison Law, PLLC, by calling (480) 320-2310.

Types of Partnerships

The Internal Revenue Service lists sole proprietorships and corporations as the most common business entities, followed by partnerships. There are several types of partnerships that individuals can consider when starting a business. Understanding each type of collaboration and the respective partnership advantages and disadvantages is essential to deciding which structure is best suited for your business. These partnership types include:

• General
• Limited
• Limited Liability

General Partnership

The most common type of partnership is a general partnership, where two or more individuals come together to run the business and share equal responsibility and liability for its debts. Family partnerships are similar but involve members of the same family.

Limited Partnerships

Limited partnerships are another standard option, where one individual takes charge of the business operations while others provide financial support with little say in the operations. In this type of partnership, the liability of the financial backers is proportional to the funds they provide to the business.

Limited Liability Partnerships

LLPs offer limited liability protection to partners, shielding them from being held responsible for another partner’s acts of negligence. All profits and losses are distributed among the partners. This structure allows for the flexibility to choose between a decentralized or centralized management approach.

Choosing the proper type of partnership is crucial for the success of your business. It is essential to weigh the pros and cons of each type of partnership to determine which structure is best for your needs. If you would like to learn more about partnerships, please reach out to Harrison Law, PLLC.

What Are the Advantages of a Partnership?

According to the United States Small Business Association, a business’s structure can affect all aspects of the company. Forming a partnership has several advantages that make it an attractive option for many businesses. These advantages include the following:

Tax Relief

One of the biggest advantages is the avoidance of double taxation. Each individual partner reports the partnership’s losses and profits on their tax returns rather than the partnership taxed as a separate entity.

Easy to Form

Another benefit of partnerships is their ease of formation. Compared to other business structures, they are relatively straightforward to set up and can be a good option for two or more individuals who want to run a business together.

Better Management and Access to Ideas

The multiple partners bring their own expertise, skills, and knowledge, which can lead to a more successful business. Additionally, having more partners involved in the company can result in better management and decision-making.

Less Up-Front Costs

While an Incorporated Limited Partnership is more complex and expensive to establish, most other partnership types have low start-up fees. Family partnerships also offer some tax benefits, and partnerships allow for more diverse investment opportunities for individuals who want to provide funding for the business. Also, partnerships offer limited liability protection to investors.

May Be Able to Change

Finally, it is possible to change the type of business after establishing a partnership. Converting to a corporation or another type of business structure is relatively simple, making it an attractive option for those who want to grow and evolve their business.

What Are the Disadvantages of Partnerships?

While a partnership may seem like an option for many businesses, there are a few drawbacks, such as:

Responsible for Other Partners’ Decisions

The downside of forming a general partnership is all partners’ joint and unlimited liability. This means that each partner is fully responsible for the partnership’s debts, obligations, and decisions. This includes legal issues such as contract breaches and tort claims. Even if one partner is sued in relation to the business, all partners are liable for the lawsuit’s outcome.

Personal Assets May Be Seized

Another disadvantage of general partnerships is that personal assets can be seized to pay off the partnership’s debts. This puts each partner’s personal finances at risk in the event of business failure. Additionally, a partnership can only be transferred with the consent and agreement of all partners, making it difficult to change the business’s ownership structure.

Partnership Could Be Dissolved

General partnerships can also be unstable due to the retirement or death of one of the partners, which can lead to the dissolution of the business. Also, the lack of clearly defined roles and responsibilities among partners can lead to a vague and ineffective business structure. If there is a disagreement between partners, who all have an equal say in decisions, it can even result in the breakup of the partnership.

Who Is Liable in a Partnership?

All partners are collectively responsible for the business’s debts, obligations, and legal issues in a partnership. This joint and unlimited liability means that each partner’s personal assets can be seized to pay off the business’s debts in the event of insolvency or default. The transfer of liability and partnership roles is challenging as it requires all other partners’ consent. In other words, passing a stake in the business to someone else can only occur through the agreement of the other partners. Additionally, partners may remain liable for the company and its debts until it dissolves.

The partnership can dissolve under certain circumstances, such as the death of a partner, resignation, retirement, or bankruptcy of a partner. In a general partnership, all partners hold an equal stake in the business and are seen as having equal authority to enter into contracts and agreements on behalf of the partnership. With that, all partners are equally responsible for any mistakes or complex agreements made by any individual partner.

Speak With an Arizona Business Attorney Today

There are many partnership advantages and disadvantages to consider. A partnership can bring numerous benefits, such as shared resources, increased market reach, and shared expertise. However, think about potential drawbacks, like conflicting goals, unequal contributions, and disputes among partners. Before entering into a partnership, it is crucial to weigh the potential benefits against the risks to make an informed decision. If you would like more information about partnerships, please consider scheduling a consultation with Harrison Law, PLLC, by calling (480) 320-2310.

© 2023 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.