What are the disadvantages of setting up a partnership?
Most partnerships are set up as a general partnership, which means that the owning partners are not entitled to any limited liability. Thus, they are personally responsible for any debts, losses or judgments which the partnership itself is responsible for - this means that creditors or successful plaintiffs can go after the partners’ personal assets in trying to fulfill the partnership’s outstanding debt. There is an obvious risk here, and this risk is even greater than the same liability risk associated with a sole proprietorship because partners may be financially responsible for actions taken by other partners. This is because the actions of any one partner, as related to the partnership, legally bind the other partners, even if they did not know or approve of that partner’s actions.
To avoid these risks, some partnerships are set up as a limited partnership, instead of as a general partnership. This form of partnership affords some limited liability protection to those partners who merely invest in the partnership without offering any management and control (so-called limited partners). However, the partners who are actively involved in running the partnership (the general partners) have the same liability risks as partners running a general partnership.