What type of partnership has unlimited liability?

A partnership is formed when between 2 and 20 people go into business together. Partnerships are governed by the Partnership Act 1958.

Types of partnerships

Partnerships can either be general or limited, which indicates the level of liability taken on by the partners.

General partnership

A general partnership is one where each partner:

• is equally responsible for the management of the business
• has unlimited liability for the debts and obligations it may incur

A family partnership is where 2 or more members are related.

Limited partnership

A limited partnership is one where one or more partners has limited liability for the debts and obligations of the business, while the rest of the partners have unlimited liability. A limited partner's liability will be in proportion to their investment in the business. There's no maximum number of limited partners.

Limited partnerships must be registered with Consumer Affairs Victoria (CAV).

Incorporated limited partnerships

An incorporated limited partnership is a special type of limited partnership, mainly used by businesses involved in high-risk venture capital projects.

See incorporated association for more information.

Get legal advice if you're considering this type of partnership.

Once you've decided that a partnership is the right structure for you, follow these steps:

If you want to operate under a name other than the partners personal names, you must register it as your business name.

Tax file number and business number

A partnership has its own tax file number (TFN) and often an Australian business number (ABN). It will use these to lodge its own tax return.

Other licences and permits

Check the Australian Business Licence and Information Service (ABLIS) to find other local, state and federal licences, registrations and permits that you need for your business.

Once the ATO assesses the partnership tax return, the partnership's profits are then divided between the partners as set out in the partnership agreement. Each partner then adds their share of the profit (or loss) to their personal income tax for assessment by the ATO.

Other tax obligations

Personal services income

The ATO's personal services income rules may apply if you're a consultant or contractor in a partnership.

Goods and services tax

If operating as a business enterprise, the partnership registers to collect goods and services tax (GST) when annual turnover passes $75,000 (payable monthly, quarterly or annually).

Employing staff

If you employ people, you'll be responsible for paying:

See the ATO's information on partnership tax returns for help when filing your return.

Superannuation for partners

As a member of a partnership you're not an employee, so you're responsible for paying your own super.

You might also be able to claim a deduction for your super contributions as part of your personal tax return. Check with the ATO to see if you're eligible.

Unlimited liability is when one or more individuals are liable for their company’s taxation and debts. In this regard, it is very different to a limited liability company. The latter is designed specifically to insulate individual limited liability company members (partners or stakeholders) from risk.

As such, no single person’s assets are affected if the company fails, gets sued or owes a debt. In a limited liability company or partnership, business partners are only liable for the amount of money they have put into the company.

In an unlimited liability company, the owner is inextricable from the business and is personally accountable for the company’s liabilities. This also means that they are entitled to the company’s profits after taxes.

However, if the business owes a debt it is unable to pay with company funds, the owner(s) will be personally liable. As such, their personal wealth or assets may be seized to cover the debt, especially if it is owed to the ATO.

In Australia, an unlimited liability company was created under the Corporations Act of 2001.

Examples of unlimited liability

The primary example of an unlimited liability company is a sole trader or sole proprietorship – an unincorporated business structure where one individual is responsible for the company. Sole traders often work as contractors or subcontractors in fields like construction or creative media.

Sole proprietorship encompasses a wide range of individuals from plumbers and electricians to graphic designers and copywriters. Sole proprietorships can, however, still hire employees without needing to change their corporate structure.

However, a partnership can also be an unlimited liability company. The liability is shared between the partners unless the partnership is a limited liability partnership.

Which is the best type of business structure for your company?.

Pros and cons of unlimited liability

Unlimited liability companies are often sole proprietorships which are easy to set up and dismantle, affording business owners greater autonomy. Unlimited companies are also not required to disclose their financial records in the same way as their limited counterparts. This non-disclosure could have tax advantages depending on the size of the company’s profits.

Generally, companies with unlimited liability are subject to fewer compliance regulations, and sole traders can retain all of their profits after tax has been deducted. However, the benefits of unlimited liability come with some clear caveats.

Having personal liability for company debts could add stress to the existing complications that come from running a business, and this may prove devastating if the individual has to use their own assets to pay a large company debt.

What’s more, because they generally involve a greater degree of risk, companies with unlimited liability may find it harder to secure funding.

Frequently asked questions about unlimited liability

How are companies with unlimited liability taxed?

Companies with unlimited liability are taxed according to their business structure. Sole traders pay income tax on their profits. Sole traders in Australia also pay workers compensation insurance and superannuation. Similarly, partners are taxed on their individual share of the profits for each financial year.

Should I choose a limited or unlimited liability business structure?

If you’re looking for a simpler life with less paperwork, an unlimited liability company may be more appealing. This means annual accounts and financial reports do not need to be prepared and shared with the public.

However, with an unlimited company comes a greater degree of personal risk. You should structure your company as a limited liability business entity if you believe the business faces a high risk of insolvency.

This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.

The legal obligation of company founders and business owners to repay, in full, the debt and other financial obligations of their companies

Unlimited liability is the legal obligation of company founders and business owners to repay, in full, the debt and other financial obligations of their companies. The legal obligation generally exists in businesses that are sole proprietorships or general partnerships. Under the two business structures, each company owner is equally responsible for repaying the business’ financial obligations.

Unlimited Liability vs. Limited Liability

With limited liability, a business owner is not legally obligated to repay the financial obligations of his company. It is a key reason that most businesses structure themselves as limited liability corporations or limited partnerships. The structures offer limited liability for business owners.

Limited liability companies and limited partnerships offer some liability protection to owners. Under these two structures, lenders cannot seize the personal assets of owners to settle outstanding claims against the company. Due to the legal protection, the loss of the business owners is limited to the capital they invested in the business.

The key differences between limited and unlimited liability can be seen below:

Unlimited Liability	Limited Liability
Business owners are legally obligated to repay the debt obligations of their companies	Business owners are not legally obligated to repay the debt obligations of their companies
The owners' personal assets can be seized to settle the financial obligations of the business	The owners' personal assets cannot be seized to settle the financial obligations of the business
Exists in sole proprietorships and general partnerships	Exists in limited liability companies and partnerships

Example of Unlimited Liability

Let us assume two partners manage a business in which they invested $20,000 each. The business also previously took out a loan of $100,000 that needs to be repaid. If the business is unable to pay back the loan, the two partners will be equally liable to settle the obligation.

In such an event, the personal assets of the partners can be seized against the claims. If one partner does not own any assets, the second partner’s assets will be seized to recover the full $100,000.

If the business were structured as a limited liability corporation or limited partnership, the two partners would only lose their initial investment of $20,000 each. This example illustrates the benefit of adopting limited liability structures. With limited liability, the personal wealth of the business owners is not at risk. Only their initial capital is lost.

Implications of Unlimited Liability

With unlimited liability, the liability of business owners is not capped. The structure can be detrimental to the personal wealth of business owners. Unlimited liability does not provide liability protection to business owners, as personal assets of owners can be seized to settle the financial obligations of the company.

The reason business owners of sole proprietorships and partnerships are subject to unlimited liability is because both business structures do not create a separate legal entity. The owners and the business are one entity. A limited partnership agreement offers limited liability to owners, as it separates the owners from the business by creating a separate legal entity. The business is, in itself, a legal entity and responsible for paying its obligations.

Due to this fact, only small businesses with little or no financial obligations are sole proprietorships and partnerships. While sole proprietorships and general partnerships are easier to set up and offer greater control, they can be dangerous for the owners of mid-sized and large businesses. As a result, businesses that start as sole proprietorships and general partnerships tend to adopt limited liability structures as they grow in size.

Unlimited liability is not limited to contractual financial obligations and includes other obligations that may arise against the business. Contingent liabilities arising from consumer lawsuits or legal action against the business can be detrimental for business owners of sole proprietorships and partnerships. Lawsuits potentially create huge liabilities. It explains why even smaller companies tend to structure as limited liability corporations.

Unlimited Liability and Capital Limits

General partnerships can also be structured in a way that allows business owners to be liable only to the extent of their ownership in the business. Under such an agreement, each partner is liable for a pro-rated share (based on their equity stake in the business) of the total liability amount. The structure can be best described as a hybrid between limited and unlimited liability.

Let us assume that three equal partners manage a business in which they invested $20,000 each. The business also owes $120,000 that it is unable to settle. Since each partner owns 33% of the company, each partner can be held liable for a maximum amount of $40,000.

Even if one partner is unable to cover his share of the liabilities, lenders can only get a maximum of $40,000 each from the other two partners. The hybrid structure provides some protection to owners but is not commonly used.

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful: