Partnership Legal Structure

So what exactly is a partnership legal structure?

Partnerships are a legal arrangement between two or more people who intend to carry on a business together. The partners, in whatever proportions agreed to in the partnership agreement, own the business.

Basically the assets of the business are owned in 'common'.

Each of the partners has an interest in the profits of the business and the partners acting together manage the business.

Partnerships can only have a limited number of partners; the number varies depending on the type of business the partners are operating.

In a partnership each partner is responsible for all of the liabilities of the business, and as with a sole trader the partners are not limited to their investment in the business. The term for this is joint and several liability.

If the business gets into trouble, a creditor can go after any one of the partners to recover the full amount of the debt, even if that particular partner is not responsible for what ever the trouble is.

The advantages of a partnership includes the ability to split the income of the business between the partners (which for a family business can have tax advantages), and as the income is viewed as the personal earnings of each partner, any businesses losses can be offset against any other the income earned by a partner.

The joint and several liability of a partnership also make it more attractive as a borrower than a sole trader.

The disadvantages include a dilution of the ownership of the business and the need to manage the day-to-day operations by consensus. As a partner you are also personally responsible for all of the debts and liabilities of the business, and you may find yourself responsible for a debt that you knew nothing about!

Another disadvantage of a partnership legal structure is that if one of the partners wants to leave or dies, the partnership no longer exists and a new partnership must be formed. This can have tax implications as the dissolution of one partnership and the formation of another is viewed as a transfer of ownership (e.g., in Australia this creates a liability for capital gains tax).

What are your other choices

If you find that this legal structure is not quite right for you and your business, you may have to consider one of the following alternatives:

• Sole Trader Legal Structure
• Company Legal Structure
• Trust Legal Structure

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