Which structure is right for me? Business advantages and disadvantages for partnerships

Partnerships are structures that involve the carrying on of a business with two or more people. The Partnership Act 1891 (Qld) (‘the Act’) governs the way partnerships are formed, governed and dissolved in Queensland.

Section 5 of the Act defines partnership as ‘the relation which subsists between persons carrying on a business in common with a view to profit’. The broad legal definition of the word ‘person’ means that a partnership can be carried on by a combination of two or more entities, meaning that even two companies may act as a partnership.

A partnership is an interesting structure in that it can come into existence without the intention of the parties to create it. A partnership is formed where: a commercial relationship is in existence between the parties; the parties use such commercial relationship to conduct a common business; and such business is conducted with a view to profit.

A partnership can be distinguished from a joint venture, which will be explored in more detail in a later publication. There are many Business Advantages and Disadvantages in partnerships.

Types of partnerships

There are a number of different types of partnership. These include:

  1. General Partnerships – where all partners are equally responsible for all aspects of the business. This means that each partner can be held liable for the debts and obligations incurred by other partners relative to the business conducted by the partnership.
  2. Family Partnerships – general partnerships that are established between members of the same family.
  3. Limited Partnerships – a partnership where some partners are able to limit their liability for the debts and obligations incurred by the partnership. There are one or more general partners, whose liability is unlimited. Then there are limited partners, whose liability is limited to an amount proportional to their investment in the partnership.
  4. Incorporated Limited Partnership – a specialised type of partnership which results in the incorporation of a separate legal entity. An ILP, as they are referred to, is responsible for its own debts and obligations. However, in contrast to a company structure, if an ILP is unable to meet the requirements of its debts and obligations, the general partner must meet those obligations.

What are the advantages of a partnership?

The advantages of a partnership include:

  • The relatively small expense to establish (with the possible exception of ILPs);
  • Partnerships allow separate people (including two companies) to pool together experience, knowledge and assets to run a mutual business together;
  • Certain tax benefits available to family partnerships (e.g. where the partners are husband and wife);
  • Limited partnerships can encourage investors to invest in your business, as they are able to limit any liability in the partnership to the proportion of their investment; and
  • Partnerships are relatively easy to change into company structures at a later date, if this is deemed necessary as the business grows.

What are the disadvantages of a partnership?

The disadvantages of a partnership include:

  • There is opportunity for disputes between partners about the sharing of profits an how the business is administered;
  • Liability of partners is the biggest concern – partners can be held liable for debts and obligations incurred by other partners relative to the business;
  • Profits must be shared in proportions provided in the ‘partnership agreement’ (usually in proportion to investments in the partnership);
  • Profits are taxed at marginal tax rates of individuals; and
  • Personal liability can result in personal assets being used to make payment of partnership debts.

Regulations

There are regulations and legislative requirements imposed on partnerships. For this reason, it is important to seek legal advice about your obligations in relation to your partnership BEFORE you commence your business venture.

Further, it is advisable to have a partnership agreement in place to govern the terms of your partnership (including regulation profit sharing). This is especially important if you will seek investors in your partnership as the business grows.

Nautilus Law Group is able to help you with all business structuring matters. We welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.

Submitted by:  Katrina E. Brown BA JD ATIA TEP SSA