What are the advantages and disadvantages of the partnership in business ownership?

A partnership is another form of a private business ownership. Partnerships have been a traditional form of ownership for professionals offering a service, such as doctors, lawyers, and dentists.

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Advantages and disadvantages of partnership

Advantages of partnerships

Partnerships offer the advantages of ease of formation, complementary management skills, and expanded financial capability. It is relatively easy to establish a partnership. As with sole partnerships, the legal requirements usually involve registering the business name and taking out needed licenses. 

Limited partners must also comply with state legislation based on the Uniform Limited Partnership Act, which spells out the requirements for this type of business organization.

It is usually wise to establish written articles of partnership specifying the details of the partners' agreement. This helps clarify the relationship within the firm and protects the original agreement upon which the partnership is based.

A common reason for setting up a partnership is the availability of complementary management skills. If the people involved were to operate as a sole proprietorship, their firms might lack some managerial skills, but by combining into a partnership, each person can offer his or her unique managerial ability.

For example, a general partnership might be formed by an engineer, an accountant, and a marketer who plan to produce and sell a particular product or service. If additional managerial talent is needed in the business, it may be easier to attract people as partners than as employees.

Partnerships offers expanded financial capability through money invested by each of the partners. They also usually have greater access to borrowed funds than do sole proprietorships. Because each general partner is subject to unlimited financial liability, financial institutions are often willing to advance loans to partnerships. Involvement of additional owners may also mean that additional sources of loans become available.

Disadvantages of partnerships

Like other forms of business ownership, partnerships have some disadvantages, including unlimited financial liability (except in cases of limited partners), interpersonal conflicts, lack of continuity, and complexity of dissolution. Each general partner is responsible for the debts of the firm, and each is legally liable for the actions of the others.

This holds true not only for debts in the name of the partnership but also for the lawsuits resulting from any partner's malpractice. As with sole proprietorships, general partners are required to pay the total debts of a partnership from private sources if necessary. In other words, if the debts of a partnership exceed its assets, then creditors will turn to the personal wealth of the general partners.

If only one general partner has any personal wealth, that person may be required to pay all the debts of the partnership. Limited partners lose only the amount of capital they invested in the firm.

Interpersonal conflicts may also plague partnerships. All partnerships, from law firm’s rock groups, face the problem of personal and business disagreements among the participants. If these conflicts cannot be resolved, it is sometimes best to dissolve the partnership because continuation could adversely affect the business.

Continuity of a partnership is disrupted when a partner is no longer able (or willing) to continue the business. Then the partnership agreement is terminated, and a final settlement is made.

It is not as easy to dissolve a partnership as it is to dissolve a sole proprietorship. Instead of simply withdrawing the business' funds, the partner who wants to leave must find someone (perhaps an existing partner or perhaps and outsider who is acceptable to the remaining partners) to buy his or her interest in the firm. Sometimes it is very difficult to transfer an investment in a partnership to another party.