This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
Of the three disadvantages applicable to the individual proprietorship, only one does not apply to the partnership. There is very little difficulty under the partnership form in attracting high-priced business talent. On the contrary, in this one respect the partnership is probably superior to both the other basic forms of enterprise. The other two disadvantages of individual proprietorship - the limitation on command of capital and the personal liability for all business obligations - are, however, shared by the partnership.
By reason of the personal character of the relationship between each of the owners and the business, it is highly undesirable that anyone should be included in a partnership unless he is personally acceptable and able. As all of the partners, except dormant or limited partners, have equal rights in the control of the business, and as any one of them may bind the entire firm by his acts or contracts, the consequences of bringing in an incompetent partner may easily be very serious. As compared with a corporation, this introduces a serious handicap in searching for fresh capital with which to develop the business. It. is necessary not merely to find one man with capital and another man with brains to help manage it, but to find one man who has both the capital and the brains, who is at the same time,.willing to devote time, money, and thought to the enterprise, and whose personality is such as to insure harmonious relations with the existing partners.
The other disadvantage, namely, the personal liability of each part owner, is even more serious in the partnership than in the sole proprietorship. In the case of the individual proprietor, he can suffer only through his own misfortunes or errors; the partner, however, may suddenly find himself face to face with heavy loss due to the bad fortune or errors of any of his partners. His own personal property (except under one of the special forms of agreement above referred to) belongs to the business and to the creditors of the business until the last debt has been paid. If one of his partners proves dishonest or treacherous, he may be called upon to foot the bill - and not merely to the extent of his previous investment in the business, but to the extent of all of his personal holdings. It is for this reason that a partnership agreement is so weighty a matter. Moreover, on the death or withdrawal of any of the partners, if an agreement cannot be reached with the retiring partner or with the estate, it may be necessary to go through all the trouble of suit in equity for an accounting and wind up the business.
In the face of these disadvantages it is not surprising that very few business concerns, outside the special classes mentioned, have retained the partnership form. It is becoming every year relatively of less and less consequence.