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We’ve looked at the upside of forming a partnership, but now our expert, the Small Business Administration, gives us the downside. Here are a few disadvantages of partnerships.

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We’ve looked at the upside of forming a partnership, but now our expert, the Small Business Administration, gives us the downside. Here are a few disadvantages of partnerships.

1. Jointly and severally liable

Partners are jointly and individually liable for the actions of the other partners. Each partner (except for a limited partner in a limited partnership) is personally liable for all the debts, taxes, and other claims against the partnership firm. If the assets of the firm are not sufficient to pay off the creditors, they can satisfy their claims out of the partners’ personal assets. In addition, when any partner fails to pay personal debts, the partnership’s business may be disrupted if his or her creditors proceed to satisfy their claims by seeking what is called a “charging order” against partnership assets.

2. Sharing of profits

Profits must be shared with others. Unlike a sole proprietorship, where the owner makes his own decisions and solely reaps the entire profits of the business, a partner by virtue of law is obliged to share the profits with the other partners. This applies only to profits, since the partners may decide not to share the losses and not every partner may bear the losses.

3. Possible disagreements among partners

Since decisions are shared, disagreements can occur. A good relationship between partners can make a strong business team, but the downside risk is that the partners may not get along. It is not infrequent to see the partners have totally different views about how the business is to be run, which can lead to dissension, acrimony, deadlock, and, in some cases, dissolution of the partnership or even lawsuits.

4. Tax disadvantage

Some employee benefits are not deductible from business income on tax returns. A partnership business may deduct the cost of various fringe benefits from income, but, unlike a C corporation, the partners must include the value of such benefits in taxable income, so that such benefits on behalf of one partner are simply a shifting of income from the other partners to that partner.

5. Terminating the partnership

The partnership may have a limited life; it may end upon the withdrawal or death of a partner. The partners may agree differently in the partnership agreement and choose to continue the business. This is in contrast to a corporation, which, theoretically, has perpetual existence. Under the laws of most states, bankruptcy of a partner or the partnership itself will cause the dissolution of the partnership, regardless of any agreement to the contrary.

Source: Small Business Administration (www.sba.gov).