Posted by Chester Morton / Monday, 5 June 2017 / No comments
The disadvantages of partnership
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.
