Question: What Are My Liabilities Under a Partnership?
Answer:General Partnership
Under a general partnership, each partner’s share of the partnership determines the dividing 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 of the business partners for the liability. This is true even if the other partners had no involvement in the transaction.
As a result of this, it is very important to know and trust your business partners before entering into a partnership together.
Even after a partner has left the business, they will continue to be liable for any debts or obligations incurred during the time 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 their entry as a business partner.
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 jointly and severally liable for business debts, as explained above; and
- limited partner, who is not liable for the misconduct or negligence of other business partners.
Further, incorporated limited partnership is a separate legal entity that:
- can sue or be sued; and
- can incur debt in its name; and
- has perpetual succession. This means it will not cease to exist when the partners die or leave the business.
Limited partnerships are typically useful when seeking to raise capital from venture capital investors, who require limited liability protection from business debts. Limited partnerships must register with the relevant state or territory department.
How to Limit Liability in a Partnership
Business owners that are 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, only the assets within the company or trust will be at risk.
In a trust, the trustee is personally responsible for any trust debts, so it is best to set up a trust with a corporate trustee. As this corporate trustee will have a nominal share capital and no other assets, 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.
A partnership of companies and/or trusts can create additional management complexity. However, a partnership agreement that includes the appointment of a corporate manager may effectively address this issue.
