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What are the potential downsides of a business partnership?

On Behalf of | Mar 21, 2024 | Business Formation |

If you are considering teaming up with a friend or relative as business partners, it’s important to understand the potential downsides of this business structure before going ahead. It can help you avoid a lot of unexpected trouble, down the line.

Sharing certain authority, like decision-making powers, can lead to disagreements if you are not on the same page with your partner. It can lead to unnecessary delays and business disruptions.

You may be liable for business debts

A partnership is not a separate legal entity from its owners. Therefore, partners are personally liable for the debts and obligations of the business. Your personal assets could be at risk if the partnership runs into financial trouble. You may also be held liable for your partner’s mistakes or misconduct if you don’t work to limit this liability in formal, enforceable ways.

Limited growth potential

Partnerships can sometimes have limited growth potential compared to other business structures, such as corporations. For instance, attracting investors or securing financing for expansion can be particularly challenging.

Disagreements and conflict

Partnerships can sometimes lead to disagreements and conflicts between partners, especially if there are different ideas about running the business. Resolving these conflicts can be time-consuming and stressful for everyone involved.

Protect your interests when entering into a partnership

While these downsides may seem daunting, partnerships offer many benefits, such as shared resources, diverse skills and shared risks. You can potentially overcome these challenges and build a successful partnership with the right approach.

Have a comprehensive partnership agreement that outlines each partner’s responsibilities, decision-making processes, profit-sharing arrangement and dispute-resolution mechanisms. This agreement can help prevent misunderstandings and conflicts down the line.

Also, consider seeking informed guidance to understand the legal and financial implications of a partnership. Doing can help protect your interests and mitigate the risks associated with this arrangement.