5 Major Disadvantages of Partnership You Need to Know Before You Sign

Discover the 5 major disadvantages of partnership in Australia. From unlimited liability to partner disputes - know the risks first.

Thinking about going into business with someone? Hold up a minute. While partnerships can be brilliant for sharing skills, costs, and workload, they come with some serious downsides that could potentially ruin your financial life if things go pear-shaped. Before you shake hands on that partnership deal, you need to understand exactly what you're signing up for.

The 5 disadvantages of partnership we're about to cover aren't just theoretical risks – they're real problems that have caught many Melbourne business owners off guard. Let's break down the major drawbacks so you can make an informed decision about whether a partnership is right for your situation.

1. Unlimited Personal Liability: Your Personal Assets Are on the Line

This is the big one, and it's worth understanding exactly what unlimited liability means for you and your family. In a partnership structure, each partner is personally liable for the business's debts and obligations. Unlike a company where your liability is limited to what you've invested, in a partnership there's no legal barrier between business debts and your personal assets.

What does this mean in real terms? If your partnership goes under, owes money to suppliers, faces a lawsuit, or can't pay its debts, creditors can come after everything you own – your house, your car, your savings, your investments, even your superannuation in some cases.

The Reality Check

Think about it this way: you could be the most responsible partner in the world, but if your business fails for any reason, you're personally on the hook for all the debts. That equipment loan you thought was just a business expense? If the partnership can't pay, they're coming after your personal assets to recover the money.

This unlimited liability extends to everything the partnership does, from unpaid supplier invoices to legal claims from customers. There's no corporate veil protecting your personal wealth like there would be with a company structure.

2. Joint and Several Liability: You're Responsible for Your Partner's Mistakes

Here's where partnership liability gets even more concerning. Each partner is 'jointly and severally' liable for the partnership's debts. This legal term means you're not just responsible for your share of debts – you're potentially liable for the entire amount if your partners can't pay their share.

Let's say your partnership owes $100,000 to creditors and you have two partners. You might think you're each responsible for $33,333. Wrong. If your partners declare bankruptcy, skip town, or simply don't have the money, you could be personally liable for the entire $100,000.

Partner Actions Bind Everyone

Even worse, each partner is an agent of the partnership and can make decisions that legally bind all partners. If your partner signs a contract, takes out a loan, or makes a business commitment you know nothing about, you're legally responsible for the consequences.

This means you need to trust your partners completely with every business decision they make, because their poor judgment could become your financial nightmare. One partner's mistake can destroy everyone's financial security.

3. Partner Disputes and Relationship Conflicts

There is a risk of disagreements and friction among partners, and these disputes can become serious business problems that effectively shut down operations. When partners disagree on fundamental issues like business direction, major purchases, hiring decisions, or expansion plans, the business can grind to a halt.

Unlike other business relationships where you can part ways relatively easily, partnership disputes often require expensive legal intervention to resolve. These conflicts can destroy both business relationships and personal friendships.

Common Sources of Conflict

Partner disputes typically arise from:

• Different work ethics or time commitments
• Disagreements about profit distribution
• Varying risk tolerance levels
• Personal financial pressures affecting business decisions
• Different visions for business growth or direction
• Unequal contribution of effort or resources

When these conflicts escalate, they can paralyze decision-making and create a toxic work environment that drives away customers and employees.

4. Difficulty Raising Capital and Limited Growth Options

Operating your business as a partnership means you're unable to take advantage of many government grants and tax concessions, such as the research and development tax concession, or early stage investor concessions. Most serious investors prefer company structures because they offer clearer ownership rights and limited liability protection.

Partnerships face significant challenges when trying to raise external capital. You can't sell shares to investors like a company can, and bringing in new partners requires dissolving the existing partnership and creating a new one – a complex and expensive process.

Investment Limitations

Professional investors, venture capitalists, and even many government funding programs are designed around company structures. They want:

• Clear ownership percentages through share structures
• Limited liability protection for their investments
• Professional governance through boards of directors
• Exit strategies through share sales

Partnerships simply can't offer these features, which severely limits your access to growth capital when you need it most.

5. Lack of Business Continuity and Succession Issues

When adding a new partner to the business, or when an existing partner exits, you need to dissolve the existing partnership and begin a new one. This can be a costly process that disrupts business operations and creates uncertainty for customers, suppliers, and employees.

Unlike companies that continue to exist regardless of changes in ownership, partnerships are inherently unstable structures. The departure, death, or incapacity of any partner can force the dissolution of the entire business.

Succession Planning Challenges

Consider what happens when:

• A partner wants to retire and sell their share
• A partner dies unexpectedly
• A partner becomes incapacitated and can't fulfill their duties
• Partners have irreconcilable differences and want to separate

Without proper succession planning (which is complex and expensive in partnerships), these situations can force the sale or closure of an otherwise successful business. The surviving partners might not have the resources to buy out a departing partner's share, especially at a time when the business is already disrupted.

Business Relationships at Risk

Customer relationships, supplier agreements, and employee contracts can all be affected when partnerships change structure. Clients who developed relationships with a departing partner might take their business elsewhere, and suppliers might require new credit assessments when the partnership structure changes.

The Bottom Line: Understanding Partnership Risks

These five disadvantages don't mean partnerships are always a bad choice, but they do mean you need to go into any partnership with your eyes wide open. The risks are real, significant, and can have lasting consequences for your financial security and business success.

Making an Informed Decision

Before entering a partnership, honestly assess:

• Your risk tolerance for unlimited liability
• How well you really know and trust your potential partners
• Whether you need access to external investment
• Your long-term business goals and exit strategy
• Alternative structures that might achieve your goals with less risk

Many of the benefits people seek from partnerships – shared expertise, reduced costs, shared workload – can often be achieved through other structures or arrangements that don't expose you to these significant disadvantages.

Professional Advice is Essential

The decision about business structure isn't something you should make based on convenience or assumptions. Professional advice from both an accountant and lawyer can help you understand the full implications of different structures and ensure you're making the right choice for your specific circumstances.

The upfront cost of proper professional advice is minimal compared to the potential cost of partnership disputes, unlimited liability claims, or business disruption that could arise from choosing the wrong structure.

---

Considering a partnership for your Melbourne business? At Future Advisory, we help local entrepreneurs understand the real implications of different business structures. We've seen the consequences when partnerships go wrong, and we're here to ensure you make an informed decision that protects your interests and supports your business goals.

Contact us today to discuss your business structure options and ensure you're choosing the right path for your venture. Because when it comes to business partnerships, understanding the risks upfront can save you from serious problems down the track.