Partnerships – the Pros and Cons

A partnership is an association of 2 or more people who carry on business as partners and distribute income and losses between themselves. In a partnership, the partners all own the business, all have control of the operation of the business and all the profits belong to the partners jointly.  With a partnership, the business is not a separate legal entity.

A partnership is one of the simplest ways to structure a business and is relatively easy to set up. Most partnerships are established by a partnership agreement which sets out the rights and obligations of the partnership. Although a partnership agreement is not compulsory, it is advisable to have a written document which clearly outlines the important aspects of the partnership at the outset of the business venture and before any disputes have arisen.

The advantages of forming a partnership include:

  • Inexpensive to set up;
  • No formalities, registration or reporting obligations other than tax returns;
  • More privacy than other business structures such as a trust or company; and
  • A broader management base, with a wider pool of expertise and capital.

The disadvantages include:

  • Unlimited liability for the partners, which means that the partners’ personal assets are exposed if the partnership’s assets are insufficient;
  • If a partner will not or cannot pay his or her share of the partnership liability, then the other partners must do so personally, jointly and severally;
  • Partners can be sued personally for anything done in the name of the partnership;
  • Potential for disputes and loss of trust between the partners;
  • Difficulties with the transfer or termination of partners; and
  • Limitations on size (generally the maximum number of partners in a partnership is 20).

A partnership may be the right business structure if there is compatibility between the business partners or if a sole trader is looking to grow his or her business through establishing a partnership.

Consideration should be given as to whether the advantages of setting up a partnership outweigh the disadvantages or whether some other business structure might be more appropriate. An accountant or lawyer can help you understand the cost and risks of a partnership.

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.