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What are the advantages and disadvantages of a partnership?

A partnership is a type of business structure in which two or more people share ownership and, thus, have equal say regarding the operation of the business. There are several advantages and disadvantages to forming a partnership in order to run a business, all of which should be carefully considered prior to setting up such a business entity.

Advantages of partnerships include the fact that they are relatively easy and inexpensive to set up. The primary portion that occurs prior to setting up the structure is devising an appropriate partnership agreement. Since a partnership divides responsibility among two or more people, the structure has the advantage of allowing the owners to pool their resources in order to obtain needed working capital. Partnerships also allow the business to benefit from the individual expertise and knowledge of each partner. In businesses that offer becoming a partner as an incentive to employees, employees may be highly motivated to do a good job in order to become a partner.

Partnership disadvantages involve interpersonal differences. In a partnership, each partner will be jointly and severally liable for the business debts and decisions made by the other partner or partners. The personal assets of each partner may be accessed to pay the business liabilities. Similarly, partnerships can involve partner disagreements and disputes, making the ability to compromise important. Along with shared debts, partnerships also involve shared profits. If one partner contributes more work and time than the others, he or she will still receive the exact same as do the other partners despite the unequal contribution.

Partnerships can be a good Business formation structure, but they are not right for all businesses. People who are considering entering into a partnership may wish to discuss it with a business law attorney. It is important to write a strong partnership agreement and choose prospective partners wisely.

Source: United States Small Business Administration, "Partnership", November 22, 2014

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