There are many ways in which a business can be structured, such as sole trader, partnership and a limited liability company.  This article examines the partnership model – what is it and what are the advantages and disadvantages of this type of business structure?

What is a Partnership?

A partnership is an association of two or more people who carry on a business as partners. It’s often used as a business structure for people who offer professional services, such as law firms, accounting or architectural firms.

Is a Partnership the Right Structure For You?

Before commencing a partnership it is important to consider, amongst other things, the personalities of the people who will form the partnership, how the partners will work together, insurance requirements, the business name, and your tax and superannuation obligations.  It is also important to consider what will happen in the case that one partner is injured or killed or wishes to retire – how will their share of the partnership be dealt with?

The Partnership Agreement

The terms of a partnership should be set out in the Partnership Agreement, the defining document that will determine how the partnership will operate. The Partnership Agreement should set out:

  • the establishment of the partnership;
  • the name of the partnership;
  • where the partnership will conduct its business;
  • how partners retire;
  • how new partners are appointed;
  • financial contributions;
  • partnership drawings and the distribution of profits and assets;
  • the role of each of the partners;
  • insurance requirements;
  • whether the partners are prohibited from borrowing from the business;
  • whether the partners are to indemnify the other partners for any negligent act or omission;
  • who is to manage the partnership;
  • what types of matters require unanimous decisions and what types of matters can be decided on partners acting alone (for example, the limit of money each partner can draw upon);
  • how partnership disputes are to be resolved;
  • how the partnership can be dissolved; and
  • what happens in the event of a deadlock between partners?

The Advantages of a Partnership

Some of the advantages of a partnership are:

  • each partner might bring a different perspective / fresh ideas to the business, whereas a sole trader does not have that advantage;
  • the start up costs of a partnership business are low;
  • each partner will inject capital, making the resources of the business greater;
  • the partnership will have greater borrowing capacity than a sole trader;
  • an offer of partnership may help retain high calibre employees;
  • partnerships have limited external regulation by bodies such as ASIC;
  • it is easy to implement a different legal structure as the business grows.

The Disadvantages of a Partnership

Conversely, some of the disadvantages of a partnership are:

  • the partners may be held personally liable for the debts of the business;
  • each partner is jointly and severally liable for the partnership’s debts – that is, if one partner does not pay, the other partner/s may be forced to pay the defaulting partner’s share;
  • there can sometimes be disharmony amongst partners and personality conflicts;
  • each partner can be liable for the negligent actions of the other partners; and
  • if one partner leaves, the other partners may be required to buy him or her out and value the partnership assets in the process.

Key Takeaways

In summary, partnerships can be an attractive business structure because they are inexpensive to set up and operate. However, the most important legal consideration in setting up or joining a partnership is to consider your own personal liability. A partnership is not a separate legal entity and depending on the Partnership Agreement, you could be held liable for the debts of the partnership. This could mean that your personal assets are at risk. A business lawyer will be able to advise you of your obligations and liabilities before signing or creating a Partnership Agreement.

Contact LegalVision on 1300 544 755 to get an obligation-free, fixed-fee quote today.

COVID-19 Business Survey
LegalVision is conducting a survey on the impact of COVID-19 for businesses across Australia. The survey takes 2 minutes to complete and all responses are anonymous. We would appreciate your input. Take the survey now.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited lawyer consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy