The structure question usually stops being academic at a specific moment. A second founder is about to come on board. A landlord wants a lease signed in someone's name. A supplier asks for a personal guarantee. A customer wants a contract that will actually hold up in court. Up to that point, running the business out of your own bank account alongside a friend or business partner works fine. After it, the questions of who owns what, who is liable for what and who decides what stop being things you can defer to "later".
The two structures, and the question hiding inside the choice
At law, a partnership is simply the relation between two or more people carrying on a business in common with a view to profit: see s 1 of the Partnership Act 1892 (NSW). No registration is required, and no document has to be signed for the relation to exist. A company is different. It is a separate legal entity that comes into existence as a body corporate on the day it is registered with ASIC under s 119 of the Corporations Act 2001 (Cth), and it can own assets, sign contracts and owe debts in its own name.
For most Australian small businesses, the real question hiding inside the headline choice is narrower. It is whether the venture has reached the point where it should become its own legal person, or whether the owners are better off staying personally on the line with a written agreement between them. A few assumptions are worth clearing up before the comparison starts:
- No paperwork does not mean no partnership: If you and another person carry on a business together and share its profits, the law treats you as partners whether or not you have signed anything.
- A proprietary company limited by shares is the standard small business vehicle: There are other corporate forms, but when owners talk about "incorporating", this is the structure they almost always mean, and it is the one compared below.
- Sole trader is not really a third option for a two-person venture: It is the same personal exposure position as a partnership, just with a single owner. The real fork in the road is partnership or company.
The factors that should drive the decision
Five issues tend to decide the question in practice. Test each against your situation rather than comparing the structures in the abstract.
Who pays if the business can't
In a general partnership, every partner is liable jointly with the other partners for all the debts and obligations of the firm: s 9 of the Partnership Act 1892 (NSW). That is not a theoretical risk. If the firm cannot pay a supplier, the supplier can pursue each partner's personal assets, including the family home and savings.
Partners are also agents of the firm. Under s 5 of the Partnership Act 1892 (NSW), a partner's act done in the usual way of the firm's business binds the firm and the other partners, even if they never agreed to it. And where the firm becomes liable for a wrong, the partners are liable jointly and severally under s 12, which means a claimant can recover the full amount from any one of them and leave that partner to chase the others.
A company changes that default. Under s 516 of the Corporations Act 2001 (Cth), a member of a company limited by shares need not contribute more than the amount unpaid on their shares. If the shares are fully paid, the shareholder's exposure to the company's debts stops there. That is what limited liability means in practice, and it is the single biggest reason owners incorporate.
But limited liability protects shareholders, not directors, and it is not automatic. Three qualifications matter:
- Directors carry personal duties: They must exercise care and diligence (s 180 of the Corporations Act 2001 (Cth)) and act in good faith in the best interests of the company (s 181).
- Insolvent trading is a personal exposure: Under s 588G of the Corporations Act 2001 (Cth), a director must not let the company incur debts when there are reasonable grounds to suspect it is insolvent, and can be personally liable to compensate the company's creditors if they do.
- Lenders and landlords routinely ask for personal guarantees: A bank, landlord or large supplier will often require the directors to guarantee the company's obligations, which puts personal assets back in play regardless of the structure.
Who gets to call the shots
Unless the partnership agreement says otherwise, partners share management rights equally. That works well while you agree and badly when you do not, because the law's default provides no built-in mechanism for resolving a deadlock. Because every partner is an agent of the firm, a co-partner can also commit the business to a deal the others would never have signed, and the firm is bound.
A company's decision-making is set out in advance. Its internal management can be governed by its constitution, by the replaceable rules in the Corporations Act, or by a combination of both: s 134 of the Corporations Act 2001 (Cth). The replaceable rules are the default rulebook that applies unless the company replaces them (s 135), and they allocate the basics: directors manage the company's business, while shareholders own the company and vote on significant changes. Many small companies then add a shareholders agreement to deal with the practical questions the law leaves open, such as how a deadlock between two 50 per cent owners is broken. The default positions are:
- Partnership: equal say by default, deadlocks resolved only by agreement or, ultimately, by winding the business up.
- Company: directors run the day to day, shareholders vote on major changes, and the rules are written down before a dispute starts.
What you keep after tax
Tax is usually the factor owners care about most, and it is the one that most depends on personal circumstances. The comparison below is general background, not tax advice. An accountant should model the numbers for your situation before you commit either way.
A partnership is not a separate taxpayer. The partnership lodges a return, but its income and losses flow through to the partners, who report their share in their own individual tax returns and are taxed at their own marginal rates. If one partner sits on a much lower marginal rate than the other, that allocation matters to both of them.
A company is a separate taxpayer. It pays company tax on its profits: 25% for base rate entities and 30% for other companies. Money then reaches the owners in different ways, salary and wages, director fees, dividends or loans, and each has its own tax and compliance consequences. Dividends usually carry franking credits for the tax the company has already paid, so the profit is not taxed twice in full. A company can also retain profits for reinvestment, which is useful when you are growing, but the company rate applies to whatever it keeps. The position for each structure is:
- Partnership: profits taxed once, in the partners' hands, at their marginal rates.
- Company: profits taxed in the company first, then again in the owner's hands when paid out, with franking credits attached to dividends.
How you bring people in and get out
Partnerships are personal. Bringing in a new partner means renegotiating the arrangement: what the newcomer pays, what share of profits they receive, what management rights they hold. If a partner wants out, there is no ready-made share to transfer. The remaining partners have to agree a valuation and a payment method, or fall back on whatever the partnership agreement says. Where there is no agreement, those negotiations start from scratch at the worst possible time.
Companies are built for ownership changes. Shares can be issued to new investors and transferred between owners without disturbing the company itself. That makes it easier to raise money, to bring in key people with equity, and eventually to sell the business, whether by selling shares or assets. If scaling, raising capital or an eventual sale is anywhere on your horizon, that flexibility is difficult to replicate inside a partnership.
What it costs to set up and keep running
Partnerships are cheap and fast. There is no ASIC registration, no annual review fee and lighter record-keeping. You can start today and formalise the relationship with a partnership agreement. The trade-off is that the low setup cost is really deferred risk: the default rules are blunt, and the document that fixes them tends to get written after a dispute, not before one.
Companies carry ongoing compliance. You register with ASIC, pay an annual review fee, keep financial records, and directors carry statutory duties that apply to them personally. That is not a reason to avoid a company. It is the price of separate legal personality and limited liability, and it is manageable with decent systems in place. But it is a recurring cost that a low-risk, two-person venture may not need yet.
How an Artificer Legal practitioner helps you make and act on the call
The decision between partnership and company is often made on assumptions that a lawyer is best placed to test. An Artificer Legal practitioner would start by stress-testing the ones that usually do the damage: that "limited liability" will protect the owners personally (it protects shareholders, not directors who have signed guarantees or traded while insolvent), and that "we will never fall out" (every partner is an agent who can bind the firm without the others' consent).
From there, the work is modelling the downside. What happens if the firm is sued and the partners' assets are on the line? What happens if a co-partner signs a deal the others would never have approved? What happens if the company takes on debt and cannot service it? Walking through those scenarios in concrete terms, rather than in the abstract, is usually what clarifies which structure fits.
Once the structure is chosen, the practitioner drafts the documents the chosen path needs. For a partnership, that means a partnership agreement covering profit share and drawings, roles and responsibilities, what requires unanimous agreement, how a partner exits and how the business is valued, a dispute resolution process, and restraints and confidentiality on departure. For a company, it means the constitution, and usually a shareholders agreement covering decision-making, share transfers, deadlocks and what happens when an owner stops contributing.
If the business is already trading as a partnership, a lawyer also works alongside your accountant on the restructure itself. Moving a running business into a company involves transferring contracts, assets and staff, and it raises tax and duty questions that need to be sequenced properly. That is a moment where advice typically pays for itself many times over.
Doing nothing is still a decision
The point that gets forgotten is that this decision happens whether you make it or not. If you and a co-owner carry on a business in common with a view to profit and never sign anything, you are still in a partnership at law, with joint personal liability and the default rules of the Partnership Act applying to you. "We have not decided yet" is not a neutral position. It is a choice to take the default rules, including unlimited personal exposure and no agreed exit process, without the documents that would tailor them. The question that repays the effort is not only partnership or company, but what the written terms say about money, decisions and exit, because those terms are what will actually govern you when things go wrong.
To recap: a partnership is a relation between people carrying on a business for profit, with no separate legal personality, where each partner is personally liable for the firm's debts and can bind the firm to deals. A company is a separate legal entity registered with ASIC, whose members' liability is limited to their unpaid shares. Companies bring more governance, more compliance and personal director duties, including the duty not to trade while insolvent, but they make ownership changes, investment and eventual sale far more straightforward. Partnerships are simpler and cheaper to run, but they leave the owners personally exposed and dependent on a written agreement to manage disputes. Whichever way you lean, run the numbers with an accountant and have a lawyer test the assumptions and draft the documents, because the structure only protects you to the extent the paperwork around it does.