WHAT is the true purpose of a "limited partnership" and what are the advantages of this structure over a company?
CHOOSING a business structure can be very confusing. Most people just go with the default "company" structure because they don't really understand their options.
A limited partnership is permitted under the Partnership Act and it is a unique structure in that it overcomes the difficulty with partnerships having unlimited liability between the partners and each partner's responsibility for the actions of others in the partnership.
Here's an example. Say you own a restaurant with four other partners and one of the partners commits to buying a wine cellar for many thousands of dollars without anyone else's consent. The wine is delivered and the other partners are furious with the decision and want it sent back. If the wine merchant deems the goods to be sold and doesn't accept the return of the wine, all the partners are jointly and severally liable for the debt. That is, of course, unless you have a limited partnership structure.
A limited partnership is registered similarly to a corporation but it limits the liability of partners to the extent of the funds contributed by the partners. In other words if you invest $100,000, you do so knowing that will be the only investment you can lose. The structure effectively caps your exposure to the world.
From a tax point of view, a limited partnership is good in that profits and losses of the partnership are the responsibility of the partners, which means that each partner takes the partnership income or loss according to their unique tax position. A partnership can distribute taxable losses and if the business is in its set-up phase or incurring losses for business expansion, these losses can be offset against the individual's income. In a company or trust, tax losses remain with the company or trust.
MY BUSINESS is coming up to a busy period and I need to increase staff levels, at least temporarily. I am considering taking on either casual employees or sub-contractors, but am unsure of the best option. Could you advise me on factors to consider for each?
FROM a legal perspective, there are many occupation awards that cover minimum payments to be made for casual employees.
So your starting point should be
to look at the award for your particular occupation and this will provide you with the minimum cost.
The law does not make it easy to hire sub-contractors when they are for all intents and purposes employees. Employees' rights mean it's not easy to categorise someone as a sub-contractor.
Taxation, superannuation, payroll tax and workers' compensation legislation cuts through all layers of agreement and on many occasions deem sub-contractors to be employees. In common law, you may think that you have a sub-contractor but if there was an accident or death, you'd have real difficulty proving that they weren't an employee.
If you're looking to use sub-contractors because you don't want the headaches associated with short-term employees, my advice would be to seriously consider a labour hire firm. The labour hire firm can be responsible for ensuring compliance with the myriad laws covering employees.
Apart from legal considerations and putting all the expenses and logistics aside, if you're looking for a minimal skill set, I'd say your best option is to go for casual workers. If you need a job to be completed that's more skill-oriented and will reflect on your business reputation as a product or service provider, I'd suggest getting some quality sub-contractors on board.
Mark Bouris is executive chairman of wealth management company Yellow Brick Road. His advice here is intended as guidance only.
If you have a question, email it to Larissa Ham at lham@theage.com.au
Frequently Asked Questions about this Article…
What is a limited partnership and how does it differ from a regular partnership?
A limited partnership is a business structure permitted under the Partnership Act that limits partners' liability to the amount they contribute. Unlike a regular partnership where partners can be jointly and severally liable for debts (for example if one partner makes an unauthorised purchase), a limited partnership caps each partner’s exposure to the funds they invested.
How does a limited partnership limit my liability compared with other structures?
In a limited partnership your liability is limited to the capital you contributed — for example, if you invest $100,000 that is the maximum you can lose. The structure is registered similarly to a corporation but specifically caps partners’ exposure, avoiding the unlimited joint liability common in ordinary partnerships.
What are the tax advantages of using a limited partnership for investors?
A key tax advantage is pass-through treatment: profits and losses of the partnership are allocated to partners according to their individual tax positions. Taxable losses can be distributed to partners and, during a setup or expansion phase, those losses can potentially be offset against an individual partner’s other income. By contrast, tax losses in a company or trust typically remain with that entity.
Can you give a practical example of how a limited partnership protects partners?
Yes — the article uses a restaurant example: if one partner buys an expensive wine cellar without consent and the merchant won’t accept a return, in an ordinary partnership all partners could be jointly liable for the debt. In a limited partnership, partners’ liability would be limited to their contributed funds, preventing unlimited personal exposure.
When might an everyday investor consider a limited partnership instead of forming a company?
Based on the article, consider a limited partnership if you want capped liability tied to your contributed funds and pass-through tax treatment where partnership losses can be allocated to individual tax positions. The structure is registered similarly to a corporation but offers different liability and tax characteristics.
Should I hire casual employees or subcontractors for a short-term busy period?
Start by checking the relevant occupation award to understand minimum costs for casual employees. Legally, hiring subcontractors when they are effectively employees can be risky: taxation, superannuation, payroll tax and workers’ compensation rules may deem them employees, and common law can make it hard to prove otherwise in the event of an accident. If you want to avoid these headaches, a labour hire firm is worth considering.
What are the practical pros and cons of casual workers versus subcontractors for temporary staffing?
Casual workers are often the simplest option for low-skill, short-term roles and award rates give a clear minimum cost. Subcontractors can be better for skill-oriented work that affects your business reputation, but they carry legal and compliance risks if treated like employees. Choose casuals for minimal-skill, short-term needs and quality subcontractors when specialist skills and reputation matter.
Who provided the advice in the article and where can I ask follow-up questions?
The practical guidance in the article is from Mark Bouris, executive chairman of wealth management company Yellow Brick Road, and is intended as general guidance only. If you have a question mentioned in the article, you can email Larissa Ham at lham@theage.com.au for follow-up.
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