A partnership involves two or more persons who carry on a business in common with the goal of making a profit. There are different types of partnerships that must be considered when determining liability faced under a partnership.
- General partnerships
- Limited partnerships
In a general partnership, each partner is equally responsible for the management of the business. This means that each partner is jointly and severally liable for 100% of partnership debts.
An example of this is if there were to be a partnership between two persons. If one of the business partners (without consulting the other partner) enters into a transaction with a third-party that the business cannot pay for, the supplier is entitled to sue either business partner for liability, despite the other business partner having no involvement or knowledge of the transaction.
Due to the joint liability in a general partnership, it is essential that there is a level of trust between persons before entering into a partnership as well as a comprehensive partnership agreement upon entry into a partnership. This will ensure that partners avoid disputes with one another.
Under a general partnership, a partner who is no longer with the business will continue to be liable for any debts or obligations incurred during the period where they were a partner of the business. The only exception to this liability would be an agreement within the partnership agreement whereby a partner is exempt from liability once they have left the business.
Partners who enter into an existing partnership will not be held liable for any debts or obligations incurred prior to entering the partnership.
If one party to the partnership operates a business where there is a conflict of interest with the partnership, the party may be liable to share the profits of their second business with business partners.
A Limited partnership consists of general partners whose liability is limited to the amount of money they have contributed to the partnership. Within limited partnerships, there is generally at least one general partner and at least one limited partner. The general partner is jointly and severally liable for 100% of all partnership debts as outlined above. In contrast, the limited partners are exempt from liability for the negligence or misconduct of other business partners.
There is a difference between limited partnerships and incorporated limited partnerships. An incorporated limited partnership is a separate legal entity. This means that it can sue and be sued, incurs debt to its name and will continue to exist should partners die or leave the business.
Can one limit their liability in a partnership?
A partner can limit their liability by entering into a limited liability partnership. A limited liability partnership ensures that if the partnership fails, creditors cannot go after a partner’s personal assets. Additionally, business partners could hold their partnership share through a company or a trust. This is because, if the business fails, the business partners would only be liable for their assets within the company or trust.
Within a trust, the trustee is personally responsible for any trust debts incurred. Under a trust, claims against the trustee will ensure that personal assets of partners are protected as limited partners are only liable for the amount of money they have contributed to the partnership.
What to take away from this article?
Based on this article, it is important to consider the type of partnership you are entering into to determine your liabilities. In a general partnership, each partner is jointly and severally liable for all partnership debts whereas in a limited partnership, partners are only liable for the amount of money they have contributed to the partnership. It is important that partners have a trusting relationship and have entered into the partnership through a partnership agreement.
If you are unsure as to your liabilities under a partnership or have any questions about what type of partnership would be better suited to enter into, get in touch with us via the contact form or by calling 1300 337 997.