What are the risks associated with entering into a business partnership?
By
The risks associated with entering into a business partnership include some of the following:
1. Liability: Partners in a business are held jointly and severally liable for any debts, obligations, and liabilities incurred by the partnership or its members. This means that each partner can be held personally responsible for all of the debts and obligations even if they were not involved in creating them. As such, it is important to ensure that all partners are aware of their potential legal liability before signing any agreements.
2. Disputes: Even with careful planning, disputes between partners may arise regarding decision-making authority or other issues pertaining to the management of the business. If these cannot be resolved through negotiation or mediation, then one or both parties may decide to dissolve the partnership which could result in financial losses to both sides as well as long-term damage to relationships among partners.
3.. Loss Of Control: The agreement establishing a business partnership usually grants certain decision-making rights and responsibilities to each partner which can lead to disagreements over major decisions especially when more than two individuals are involved in running the company. Additionally, new partners joining an existing partnership may have different goals and objectives from those already established thereby reducing control previously enjoyed by other members of the group (what is called "dilution").
4.. Taxation Issues: Depending on how profits are distributed among partners there can be significant taxation implications ranging from increased income tax liabilities due on individual returns at year end (if distributions are large) or deduction disallowances should audit occur later on down the road (due improper documentation). It is important that partnerships adequately address this issue prior to forming an entity so as not avoid surprise costs later on down the line whether it’s related directly back taxes/penalties or just costly accounting/legal fees required for correction / defense over time.(for example check Internal Revenue Code Section 707(c)).
It is also advised that interested parties seek legal advice before getting into a formal agreement setting out rules regarding operational procedures and dispute resolution mechanisms amongst themselves so as ahead off potential problems further down line between multiple people who have joined forces .
