Whether you are starting a new business, buying a share of a business, or purchasing a business, as Rowe Bristol Lawyers will advise you, that business can be structured in several ways. It is important to know what these structures are and more importantly, the pros and cons of each of them. In Australia, you will usually have four different business structures to choose from. These are the basic details of each of them:
Sole Trader: Legally and financially, you are the business and are wholly responsible for fulfilling its obligations, including the payment of debts, and taxes. As a sole trader, your business is not a separate legal entity to yourself.
Trust: A trust has members or beneficiaries rather than owners, and the responsibility for running that trust and carrying out the necessary administrative tasks falls upon trustees appointed by those beneficiaries. Trusts are complicated and you most definitely require input from commercial lawyers if setting one up.
Company: When a company is set up, it exists as a separate legal entity from its owners aka shareholders. A company can be sued, and it can incur debt, but the liability of the shareholders of the company is limited. A company will have one or more directors responsible for its good governance and commercial decisions.
Partnership: A partnership exists where 2 or more people share the assets, income, and liabilities of their business. Control and management of the business are also usually shared. Whilst they can be legally akin to a sole trader, there are partnership types that have different legal statuses.
That fourth option, partnerships, is the one we are going to focus on because it seems to cause more confusion than the others. For a start, there are three types of business partnerships you can create or enter. Partnerships also have several pros and cons so let us look at partnerships in a little more detail and highlight those pros and cons.
3 Types Of Business Partnership
General Partnership (GP): The responsibility for managing the business, and any liabilities which apply to the business, are shared between each partner. Each partner has unlimited liability for the business’s obligations and debts.
Limited Partnership (LP): This tends to be a financial arrangement rather than a scenario where partners are actively working within the business. With an LP, the liability of each partner is limited to how much money they have invested in the business.
Incorporated Limited Partnership (ILP): Similar to a company where the liability of the partners who own the business is limited. However, there is one caveat as one partner must be designated a general partner whose liability is unlimited.
- Can be set up without great expense
- Few administrative obligations and formalities to start and run the partnership
- Partner details can be kept private, unlike companies and trusts
- Pooling and sharing of resources, capital, skills, and experience
- Tax only paid on each partner’s share of income, not the total
- Unlimited liability means personal assets can be at risk
- If one partner cannot meet their obligations, other partners are liable for that too
- Each partner can be sued as an individual for something done on behalf of the partnership
- Possibility of fallouts, disagreements, disputes, and animosity between partners
- Termination and transfer of partnerships is not always a simple process
Despite the pros, the fact that those cons exist means that you should always seek advice from your commercial lawyers about any matters concerning a business partnership.