Forming a business is a big step. For many people, going it alone is too scary of a concept and, therefore, may prompt them to bring in a partner. While going into business with your best friend, peer or significant other may sound like a wonderful idea, the truth is you may not be able to count on that relationship if and when times get tough.
Partnerships are the most common and most simple type of business arrangement. While they may be simple and common, they come with a specific set of disadvantages. Many business partnerships are unwritten agreements between friends. This informal type of arrangements opens partners up to liability. Unless the business partnership is in the form of a limited liability corporation, the partners can be on the hook for liabilities and debts associated with the business in the event it becomes insolvent. Each partner's personal assets can be used to cover business expenses.
Many of these partnerships are an informal agreement, and therefore, are typically absent of any written contract between partners. Without a written agreement, each partner's share of the business is his or hers alone. This means that one partner's stake cannot be reassigned to the other partner or anyone else without his or her written consent. This inflexibility in transferring ownership may be a particular pain if the partners are in disagreement.
Perhaps one of the biggest drawbacks to an informal business partnership is the vagueness of each partner's duties and authority. Without a written agreement outlining duties, responsibilities and authorities, partners may find it difficult to delegate fairly.
Informal business partnerships may open individuals up to unnecessary liabilities and litigation. The lack of a clear hierarchy of authority, the inability to transfer ownership and the unnecessary exposure to business-related debts, can make a business partnership one of the most difficult business arrangements to control. Individuals concerned with their partnership arrangement or looking to form a limited liability corporation may benefit by speaking to a business law attorney.