Sydney-based lawyer. Formerly Legal Intern at Lawpath.
Each business structure has its advantages and disadvantages, and it’s useful to know them before deciding how you will structure your business. Specifically, in this article we will be discussing the advantages and disadvantages of a partnership business structure – so you know whether it is the right fit for you.
What is a Partnership?
A partnership is a legal arrangement where two or more individuals or entities manage and operate a business together, sharing profits, losses, and responsibilities. Partnerships can be general, where all partners share liabilities equally, or limited, where some partners have restricted liability based on their investment.
In simple words, a partnership is one way you can go into business with another person, without the obligations of registering a company. Starting a partnership means that you’ll be running a business in conjunction with 1 to 20 other people. You’ll all receive equal ‘cuts’ of the profits, and be equally liable. Many corporate firms operate under this structure, such as law and accounting firms. A partnership is a great way to run a business with other people, but you should make sure you’re on the same page.
The creation of a partnership is relatively informal. However, different to being a sole trader, a partnership has its own separate Tax File Number (TFN) and Australian Business Number (ABN). Partnerships are also not recognised as separate legal entities (like companies are). Similarly, partners are equally responsible for the business’s losses.
Although partnerships are informal in nature, having a partnership agreement is important. Having an agreement will clarify each partner’s obligations, and the process moving forward if any disputes arise.
Advantages of a Partnership
Working with someone else in a partnership does have advantages. Besides having the combined knowledge of two or more individuals, there are other advantages of going into business with somebody else:
- Working together may improve the efficiency of the business, particularly as partners will have a shared vision for success
- Partnerships are generally less expensive than companies, and easier to set up
- You and your partners will be equally responsible for the business
- You and your partners will have the advantage of flexibility
- The structure can always be changed later
- Partners will share in the net profits of the business as well as having equal say in how the business is run
Example
Ray is an accountant working for a large firm. Ray has decided to ‘go out on his own’ and start his own business. He has a colleague, Maria, who is keen to join him. Maria and Ray start a partnership as an accounting firm. This works well for them, as they share all the profits and pay the same tax.
Disadvantages of a Partnership
Different business structures will have disadvantages. Partnerships are no different, obviously the main difficulty will be working alongside another individual who will have different opinions. Besides this, there are a few other disadvantages:
- Disagreement and friction between partners in decision making may cause risk to the business;
- Partnerships are not their own legal entity, therefore they have unlimited liability which is spread across all partners, partners that do not pay their share of debt will leave other partners liable; and
- Partners are considered ‘agents’ for other partners, their actions may leave other partners liable.
Conclusion
There are a range of advantages and disadvantages of a partnership business structure. However, a partnership is one of the easiest ways to conduct business with other individuals. Furthermore, it’s important to be mindful that you will still be responsible for the losses and liabilities of the business. If you’re unsure as to whether a partnership is right for you, a business lawyer can advise you.
