A partnership is a business structure involving more than 2 people who distribute income or losses between themselves. There are three main types of partnerships – (1) general partnership (2) limited partnership (3) incorporated limited partnership. Partnerships (2) and (3) can only be formed by registering the entity, while partnership type (1) can be implied through conduct of parties, agreements (oral or otherwise).
The key difference between a partnership and a company, is that in a partnership, each partner can be personally liable for the partnership’s debt. In a company, a director of a company cannot be held personally liable for the company’s debt, except in specific, limited circumstances. Here is an example. Person A and Person B own a café. The business purchases coffee beans from company C. Assuming that the business is unable to make payment of the invoice after delivery of the coffee beans, Company C will have the legal rights to make a claim against the business. If the business is run as a partnership, Company C would strictly speaking, be able to eventually enforce their rights against Persons A and B personally. Assets owned by Persons A and B would be up for grabs in the worst of scenarios. If the business is a company, Persons A and B will be shareholders, and presumably directors, Company C’s claims would be against the company, and not Persons A and B directly. This makes a big difference in assessing the risks between a partnership and a company.
Senior Associate (Admitted in Australia, Singapore and England & Wales)