When it comes to starting a business, one of the most important questions you should ask yourself is, “What business structure is best for me?”.

This is because your structure will need to be suited to your business goals, resources and finances. One of the most common types of structures is a partnership, but there are a few things to note in this area. 

What Is A Partnership?

A partnership is a type of business structure that is common due to its simple and relatively cheap set-up process. It generally involves two or more people working together to run an enterprise. 

There are multiple types of partnership:

  • Limited liability partnerships
  • General partnerships
  • Limited partnerships

What Is A Limited Liability Partnership?

Limited liability partnerships allow two or more partners to work together without the burden of complete responsibility for any other partner’s actions. In other words, some partners can benefit from limited liability, meaning they won’t be personally responsible for the business’ debts. 

What Is The Difference? 

Limited liability partners are not to be confused with limited partners or general partners.

Limited partners do not play a role in managing the business, so their contribution to the business is almost exclusively financial. 

General partners are responsible for running the business and they have complete liability towards the business. 

What Is Limited Liability?

Liability refers to the legal responsibility over something. Limited places a barrier on this. Thus, limited liability means there is only a certain extent to which responsibility can be extended.

In the context of limited liability partnerships, the liability being referred to is the actions of the other partners. One partner cannot be liable for the unlawful or negligent actions of another partner in a limited liability partnership.

If you’re familiar with a company structure, they also have limited liability. This just means that where the company owes money to another party, that is the business’ responsibility as a separate legal entity. The directors will not be personally liable for paying that debt. 

A good way to define the term ‘limited liability’ is to see the business as its own person. So, like a human, it is capable of owing money and being owed money. 

How Is A Limited Liability Partnership Different To Other Business Structures?

There are multiple types of business structures and partnerships for businesses to consider. A limited liability partnership may be suitable for your business if you plan on expanding. Comparing it to the other business structures out there can help you decide.

A sole trader will work on their own. They are the only owner of their business, so all responsibility, loss and gains fall on them. In other words, they have unlimited liability – the business’ debts are also their personal ones. 

A company is a legal entity on its own. It can buy and sell property and incur debt like a person. The business structure of a company means it is controlled by shareholders.

A general partnership has all the elements of a business partnership. However, without the limited liability aspect, the partners are equally responsible for the actions of one another.

An incorporated limited partnership is where all except one of the partners of the business will have limited liability. The one partner who doesn’t possess limited liability will be required to take on full responsibility for any legal incidents.  

How Do I Set Up A Partnership?

In NSW, setting up a limited liability partnership will require filling out a registration form. The form will ask for details about your business and the partners involved. Once the application is lodged and successful, you will receive a certificate of registration

After that, your partnership is officially a registered business and you’re ready to move ahead!

 

When Do I Need A Limited Liability Partnership Agreement?

As soon as the parties decide to go into business together, the aforementioned things should be hashed out. Before the business begins, a Partnership Agreement should be entered into. It’s advisable to have the agreement written and signed before registering the business together,

Therefore, if there is a fallout, no legal work has taken place yet.

What Does A Limited Liability Partnership Agreement Include?

 A Limited Liability Partnership Agreement is a contract between the business partners that details the purpose and confinements of their working relationship. To set up a limited liability partnership, you will need to decide on a number of things, such as:

  • The motivation behind the business
  • Identifying the respective partners of the business
  • The main postal address and bank account
  • Rights and responsibilities of each partner
  • The powers of each partner
  • What the management of the business will look like
  • Financial responsibilities
  • Decision making and conflict resolution
  • Exit clauses

It’s advisable to seek the counsel of an experienced legal expert when drafting these agreements.

Example
Tia and Andrea are setting up a limited liability partnership for their phone repairs business. The two have decided that Andrea will be responsible for external repairs such as a cracked screen or broken button and Tia will be responsible for  glitches that are occurring within the software of the phones. 

As the two components of the business generally don’t overlap, they don’t feel they will need to consult each other much. When drafting up their limited liability partnership agreement, their lawyer is careful to include the specific responsibilities of both parties so that if either Tia or Andrea upsets a customer and faces legal action, the other partner is protected.

Advantages Vs Disadvantages

There are multiple pros and cons to running a limited liability partnership.

What Are Some Pros?

  • Greater options – there is no rigid structure to a limited liability partnership. This gives partners the ability to control the extent of their involvement and which aspects of the business they wish to partake in.  
  • Ease – the business structure is simpler to accomplish and set up than other business types.
  • Taxation – partners file taxation on their individual tax returns with all returns being divided according to both partners interest in the partnership. No income tax on the returns, just the separate taxes for each partner.
  • Protection – in a limited liability partnership, you won’t be responsible for the bad actions of your partner, should they partake in any.

What Are Some Cons?

  •  Instability – a partnership as such can be dissolved quicker or be more susceptible to conflict for its lack of accountability towards other partners.
  • Lack of consultation – as both partners are not liable for the actions of the other, it may not prompt equal communication between both partners as they are not legally required to consult one another.
  • Adding other people – major changes, such as adding another person as a partner without requiring the permission of the other partner or partners, is legal in a limited liability partnership.
  • Dependent on state – business partnerships are not regulated by federal law but rather state law. Therefore, checking the Partnerships Act for your relevant state is crucial as certain things will vary from state to state.

Key Takeaways

A limited liability partnership is a clever way to ensure you can go about your business without worrying about another partner dragging you down. However, it is not without its weaknesses – something that is entirely dependent on the type of business you are running. 

Deciding whether or not this business structure is right for your endeavour usually requires some expert advice.

If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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