CHAPTER 3 Business structures 95accounting standards. The partnership itself does not pay tax on the income earned by the partnership.
The main advantage of a partnership over a sole trader is that the partnership combines the skills, talents
and knowledge of two or more people, allowing the decision making and workload to be shared among
the partners.
Disadvantages
Similarly to sole traders, the partnership is characterised by unlimited liability. Therefore, the partners
are fully responsible for all business debts and obligations, irrespective of their involvement in the entity.
Another major disadvantage of partnerships is that the partnership form has a limited life, as it will
automatically dissolve if one of the partners dies or withdraws from the partnership, or if there is an
irresolvable dispute. A great number of partnerships find themselves involved in disputes because of
disagreements concerning profit sharing or decision making for the business. Further, in most forms of
partnership, growth is limited due to a set number of partners allowed.
Another disadvantage is known as mutual agency. Mutual agency is when each partner is seen as being
an agent for the business, having the right to enter into contracts for the business and being bound by any
partnership contract. Some of these contracts could be inappropriate or risky, involving the repayment of
sums of money that the business cannot afford or involving relations with an unreliable third party.
Illustrative example 3.2 demonstrates one of the many ways in which a partnership can be constructed.
ILLUSTRATIVE EXAMPLE 3.2The partnership
Martina, James and Brigitte met at the University of Queensland when they were completing their Honours
year of their Bachelor of Commerce degree in the early 2000s. The three maintained their friendship over
the years, and after several years working in the public sector they set up their own accounting practice in
the Brisbane CBD in July 2015. They offer several accounting-related services such as taxation, budgeting
and financial planning. Both Martina and James are CPAs and Brigitte is a CA. The three of them decided
to form a partnership because they wanted to combine their different skills and expertise in three different
accounting areas, thereby offering a range of services under the one business name. Each of the three part-
ners contributed some form of asset to the business. Martina contributed cash of $100 000, James contrib-
uted a building valued at $400 000 that he inherited from a great aunt, and Brigitte contributed office furniture
worth $60 000. In their partnership agreement, they outlined that profits and losses would be split according
to their respective capital contributions. The partners hope soon to expand their business, and are already
negotiating with a tax accountant from the firm, Dunstan & Co.VALUE TO BUSINESS• A partnership is an association of two or more persons or entities who carry on business as partners
and share profits or losses according to their ownership structures, as outlined in the partnership
agreement.
• Partnerships are relatively easy to set up, with minimal costs and resources required to commence
operations.
• The individuals should complete a partnership agreement, which includes details such as the name
of the partnership, the contributions of cash and other assets, and the profit and loss sharing
arrangement.
• Partnerships have several advantages. They include minimal time and resources needed to set up a
partnership, and the ability to combine the skills, talent and knowledge of two or more people.
• There are several disadvantages to the partnership structure. They include the unlimited liability of the
partners in relation to debts and legal actions against the partnership, and the automatic dissolution of the
partnership if one of the partners dies or withdraws, or if there is an irresolvable dispute.