What Are My Liabilities Under a Partnership?

In Short

• General Partnerships: All partners share full responsibility for business debts, regardless of individual actions.​

• Limited Partnerships: General partners manage the business with unlimited liability; limited partners invest capital and have liability limited to their investment.​

• Incorporated Limited Partnerships: These are separate legal entities, offering liability protection and continuity beyond the involvement of individual partners.​

Tips for Businesses

To safeguard personal assets and minimise liability, consider structuring your partnership shares through companies or trusts. Additionally, a comprehensive partnership agreement is vital to define roles, responsibilities, and dispute resolution mechanisms, thereby reducing potential conflicts and liabilities.

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Table of Contents

• General Partnership
• Limited Partnership
• Fiduciary Duties to Other Partners and the Partnership
• How to Limit Liability in a Partnership
• Key Takeaways
• Frequently Asked Questions

Liability in a partnership depends on its type, applicable laws, and asset structure. This article provides an overview of the three types of business partnerships, such as general partnership, limited partnership, and incorporated limited partnership, and their associated liabilities. It also explains how effective business structuring can further limit liability.

General Partnership

Under a general partnership, each partner’s share of the partnership determines the division of assets. Each partner is jointly and severally liable for 100% of partnership debts.

For example, if one business partner enters into a transaction with a third-party supplier that the business cannot pay for, the supplier can personally sue any business partner for the liability. This is true even if the other partners were not involved in the transaction.

Consequently, it is very important to know and trust your business partners before entering into a partnership.

Even after a partner leaves the business, they will continue to be liable for any debts or obligations incurred while they were part of the partnership unless there is an agreement absolving this liability.

Partners entering an existing partnership are not liable for debts or obligations incurred before they become business partners. If a business partner is operating a business that may compete with the partnership, they:

• must keep their partners properly informed; and
• may be liable to share the profits of this second business with their business partners.

Limited Partnership

Limited partnerships and incorporated limited partnerships are governed differently across Australian states.

Typically, limited partnerships have at least one:

• general partner, who is responsible for managing the business and is jointly and severally liable for business debts, as explained above; and
• limited partner, who typically contributes capital but does not participate in the management of the business. Their liability is limited to the amount of capital they have invested in the partnership.

Further, an incorporated limited partnership is a separate legal entity that:

• can sue or be sued; 
• can incur debt in its name; and
• has perpetual succession.

The requirements for registering an incorporated limited partnership vary by state. For example, in Victoria, an application can be made if the partnership is:

• already registered or intends to apply for registration under Part 2 of the Venture Capital Act 2002 (Cth);
• already or intends to become a venture capital management partnership as defined in section 94D(3) of the Income Tax Assessment Act 1936 (Cth); or 
• any other circumstances that may be prescribed by regulations

Limited partnerships must register with the relevant state or territory department, with requirements varying by jurisdiction. They generally face fewer ongoing regulatory requirements than companies but are typically restricted to specific purposes, mainly related to venture capital activities as defined by state and Commonwealth legislation. This specialised nature, combined with their unique structure and tax treatment, makes limited partnerships a distinct option for certain business ventures and investments.

Fiduciary Duties to Other Partners and the Partnership

Partners in a business have a fiduciary obligation to one another, grounded in principles of loyalty, trust and confidence. This obligation is based on equity and enshrined in legislation, requiring each partner to act in the best interests of the partnership and their fellow partners. For example, in equity, there is a ‘no [private] profit’ rule incorporated into legislation under sections that give effect to the duty of partners to render true accounts and complete information of all things affecting the partnership to any partner or the partner’s legal representatives. To minimise liability, it is crucial to understand your fiduciary obligations in a partnership as a matter of general law and legislation according to your relevant state or territory.

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How to Limit Liability in a Partnership

Holding Partnership Shares Through Companies or Trusts

Business owners concerned about exposing their personal assets to a partnership’s debts might consider holding their partnership share through a company or a trust. If the business fails, generally only the assets within the company or trust will be at risk.

It’s best to set up a trust with a corporate trustee when using a trust. The trustee is personally responsible for trust debts, but a corporate trustee will have nominal share capital and no other assets. Thus, except in very limited circumstances, such as those involving a breach of trust, claims against the trustee will not expose the business partner’s personal assets.

While initial and ongoing costs and additional management complexities are associated with setting up and maintaining a partnership of companies and/or trusts, the level of protection offered often outweighs these costs.

Partnership Agreements

A well-drafted partnership agreement is crucial in limiting liability and preventing disputes. Key elements to include in a partnership agreement are:

• clear definition of each partner’s roles, responsibilities, and decision-making authority;
• profit and loss sharing arrangements;
• capital contribution requirements;
• procedures for admitting new partners and exit strategies for existing partners;
• dispute resolution mechanisms; and
• confidentiality and non-compete clauses.

A comprehensive partnership agreement can help limit liability by: 

• preventing misunderstandings that could lead to costly disputes; 
• clearly defining the scope of each partner’s authority, reducing the risk of unauthorised actions; 
• establishing processes for managing business risks and liabilities; and 
• providing a framework for resolving disputes without resorting to litigation.

Importantly, regular reviews and updates of the business structure and partnership agreement will ensure ongoing protection as the business evolves. Furthermore, appointing a corporate manager can provide an additional layer of protection by separating day-to-day management from the partners.

Key Takeaways

The type of partnership you enter into significantly impacts your liability. All partners are jointly and severally liable for business debts in general partnerships. Limited partnerships offer some protection for limited partners, while incorporated limited partnerships provide a separate legal entity. Each type has different registration requirements and is governed by varying state and Commonwealth laws. 

To minimise liability, consider holding partnership shares through companies or trusts, which can protect personal assets. Furthermore, drafting a comprehensive partnership agreement is crucial, as it can clarify roles, responsibilities, and dispute resolution procedures. Additional measures like appointing a corporate manager can provide further protection. 

Given the complexities of partnership structures and associated liabilities, seeking professional legal and financial advice is advisable. Regularly reviewing and updating your partnership agreement and business structure is vital to ensure ongoing protection as your business evolves. Understanding your fiduciary duties to other partners and the partnership is essential in avoiding potential liabilities.

If you have any questions regarding liabilities, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Are all partners personally liable for business debts in a partnership?

In a general partnership, all partners are jointly and severally liable for 100% of the partnership’s debts, even if only one partner incurs them. However, in a limited partnership, limited partners are only liable up to the amount of their investment, while general partners remain fully liable. An incorporated limited partnership is a separate legal entity, meaning the business, rather than the partners, typically assumes liability.

How can I protect my personal assets in a partnership?

To limit liability, consider holding your partnership share through a company or trust. This ensures that only the company’s or trust’s assets are at risk, rather than your personal assets. Additionally, a well-drafted partnership agreement can define roles, responsibilities, and dispute resolution processes, further minimising liability exposure.