Disadvantages Of A Partnership In New Zealand: Key Risks To Know

Going into business with someone you trust can feel like the perfect shortcut to growth. You can split the workload, combine skills, share costs, and move faster than you could alone.

But before you commit, it’s worth slowing down and looking carefully at the disadvantages of running a partnership in New Zealand. Partnerships can work really well - but they also come with some unique legal and commercial risks that can catch small businesses and startups off guard.

Note: This article is general information only, not legal advice. Partnership rules can vary depending on your circumstances (including whether you’re in a general partnership or a limited partnership), so it’s worth getting tailored advice. We also touch on profit sharing and drawings at a high level - for tax and accounting advice, you should speak with an accountant.

In this guide, we’ll walk you through the key risks (in plain English), the real-world situations where partnerships tend to go wrong, and the practical steps you can take to protect your business from day one.

What Is A Partnership (And Why Do So Many Small Businesses Choose It)?

In New Zealand, a partnership is usually where two or more people carry on a business together with the intention of making profit. It can be formal (with a signed agreement) or informal (based on how you behave in business).

Most people mean a general partnership when they say “partnership”. There are also limited partnerships under the Limited Partnerships Act 2008, which can work differently (including around liability and investor/manager roles). The risks below most commonly arise in general partnerships.

Partnerships are popular because they’re relatively simple to start. You may not need to incorporate a company, and you can often just begin trading together.

Common reasons businesses choose a partnership include:

• Sharing startup costs and cashflow pressure
• Combining different skills (e.g. one partner sells, the other delivers)
• Splitting responsibilities so the business can operate more consistently
• Moving quickly without the admin of company governance

That said, “simple to start” doesn’t always mean “safe to run”. The biggest issues tend to show up later - when money is on the line, relationships change, or the business hits a stressful period.

Disadvantage #1: Unlimited Personal Liability (Your Personal Assets Can Be At Risk)

If you’re weighing up the main disadvantages of a partnership, this is usually the biggest one.

In a general partnership, partners typically have unlimited personal liability for partnership debts and obligations. In many cases, liability is joint and several - meaning a creditor may be able to pursue one partner for the full amount, and it’s then up to the partners to sort out contributions between themselves.

In practical terms, this can put personal assets at risk, such as:

• Personal savings
• Your car (if it’s not protected and you’ve given guarantees)
• Property and equity (particularly where personal guarantees are involved)

Why This Risk Feels “Invisible” At The Start

Early-stage businesses often don’t feel risky. You might have a handful of customers and small overheads. But as soon as you:

• sign a lease
• take on a loan or equipment finance
• hire staff
• enter into supply contracts

…your exposure can grow quickly. If things go wrong, the line between “business risk” and “personal risk” can become very thin.

If you’re considering whether a partnership is right for your growth plans, it can help to compare it with setting up a company and adopting a Company Constitution, which can provide clearer governance and (in many cases) a different liability profile.

Disadvantage #2: You Can Be Responsible For Your Partner’s Actions

Another major disadvantage of a partnership is that one partner’s decisions can create legal and financial consequences for everyone involved.

Generally, the partnership can be bound by what a partner does (and partners can be personally on the hook) where a partner acts with authority - including where they act in the ordinary course of the partnership business. There can be limits (for example, where a partner has no authority and the other side knows that), but in day-to-day trading it can be hard to “unwind” what a partner has committed the business to.

Here are a few common examples:

• A partner signs a contract on behalf of the business that locks you into expensive terms.
• A partner promises a customer something that becomes hard to deliver, triggering refund demands or disputes.
• A partner takes on debt that creates cashflow pressure for the whole business.

Why This Is Especially Risky For Startups

Startups move fast. If one partner is focused on growth and the other is focused on stability, decision-making can become messy. Without clear authority rules, your partner might be able to commit the business to obligations that don’t match your risk appetite.

To reduce this risk, many businesses put boundaries and approval rules into a tailored Partnership Agreement (for example, requiring both partners to sign off on contracts over a certain dollar value).

Disadvantage #3: Profit, Control, And “Who Does What” Can Become A Constant Tension

Most partnership disputes don’t start with a big blow-up. They usually start with small frustrations:

• One partner feels like they’re doing more work.
• One partner feels like they’re taking more risk.
• Partners disagree about pricing, hiring, or marketing spend.
• Partners have different views about whether to reinvest profits or take drawings.

Over time, those issues can turn into serious conflict - and conflict can stall growth, damage customer relationships, and make it harder to make quick decisions.

Equal Partners Often Sounds Fair (Until It Doesn’t)

It’s common for people to begin a partnership on a “50/50” basis because it feels fair and simple.

But in reality, partners rarely contribute equally across every area. One partner might bring in clients, another might invest more money, and another might take on day-to-day operations. Without a clear framework, you can end up with:

• deadlocks (especially where decisions require consensus)
• arguments about whether drawings are “fair”
• resentment when one partner takes time off or changes their availability

Even if you’re not ready to incorporate a company, it can still help to think like a company: set expectations about roles, authority, and decision-making early, and record those expectations clearly.

Disadvantage #4: It Can Be Hard To Exit (And Exits Are Where Disputes Often Happen)

One of the most overlooked disadvantages of a partnership is how difficult it can be when someone wants to leave - or when you want them to leave.

Imagine this scenario:

Your business is finally profitable. One partner wants to take a job overseas, and the other partner wants to keep operating. You disagree on what the business is worth, who owns the customer relationships, and whether the leaving partner should still receive profit from existing contracts.

If you don’t have a clear exit pathway written down, you can end up stuck in a costly dispute.

Common Partnership Exit Problems

• No clear valuation method (partners can’t agree what the business is worth)
• Unclear ownership of assets (equipment, IP, domain names, social media accounts)
• No process for buying out a partner (or timeframe for doing it)
• Bank accounts and supplier accounts still require both partners, causing operational delays
• Client relationships become contested

Where a partnership is no longer workable, a formal Partnership Dissolution Agreement can help document what’s happening with the assets, liabilities, client handover, and any final payments - which can be especially important if emotions are running high.

Disadvantage #5: Raising Investment And Scaling Can Be More Complicated

Many startups begin as partnerships because they’re quick and informal. But once you try to scale, partnerships can become limiting - especially if you want external investment.

Investors often want clear answers to questions like:

• Who owns what percentage of the business?
• How are decisions made?
• What happens if a founder leaves?
• Are there any existing disputes or unclear liabilities?

Partnerships can answer these questions, but you generally need strong documentation to do it. Otherwise, the arrangement can look uncertain from an investor’s perspective.

Why Shares And Clear Ownership Often Matter

In a company structure, it’s easier to define ownership through shares, record decision-making rules, and set out what happens if a founder exits. That’s why many growth-focused businesses move to a company model and put in place documents like a Shareholders Agreement to manage voting rights, transfers, and dispute resolution.

This doesn’t mean partnerships can’t scale - it just means you should plan ahead. If you’re aiming for rapid growth, hiring a team, or taking investment, it’s worth getting advice early on what structure will best support your long-term plans.

How Do You Reduce The Risks If You Still Want A Partnership?

A partnership isn’t “bad” - it just needs the right foundations.

If you like the flexibility of a partnership but want to avoid the most common traps, here are practical steps you can take.

1. Put A Proper Partnership Agreement In Place

A written agreement can help turn vague expectations into clear rules. It can cover things like:

• each partner’s role and responsibilities
• how profits and losses are shared
• who has authority to sign contracts (and limits on that authority)
• what happens if a partner wants to exit
• restraint and non-solicitation expectations (where appropriate)
• how disputes are handled

If you’re already operating together and things are going well, that’s often the best time to document it - before the business hits pressure.

2. Use Clear Contracts With Customers And Suppliers

Partnership disputes can be triggered (or made worse) by unclear external contracts. For example, if one partner signs a contract with unfavourable liability terms, the entire business can feel the impact.

Depending on what you do, you might need a tailored Service Agreement or Business terms to set expectations around scope, payment, delays, liability, and dispute resolution.

3. Protect Your Brand And Key Business Assets Early

Partnership breakups can get messy when nobody knows who owns the “core” business assets. That might include:

• your business name
• trade marks and logos
• domain names
• customer databases
• software code or systems
• social media accounts

Even if you’re not ready to make big legal moves, it helps to document what belongs to the partnership vs what belongs to an individual partner.

4. Don’t Forget Your Compliance Obligations

Partnerships still need to comply with the same laws as other business structures. For many small businesses, key obligations often include:

• Consumer law (including the Fair Trading Act 1986 and Consumer Guarantees Act 1993) around advertising, customer promises, refunds, and product/service standards
• Privacy law (Privacy Act 2020) if you collect customer details, run email marketing lists, or store client records - in many cases you’ll want a clear Privacy Policy
• Employment law if you hire staff - you’ll typically need a properly drafted Employment Contract and compliant policies/processes
• Health and safety duties under the Health and Safety at Work Act 2015 (particularly if you operate from a physical site or provide services onsite)

Getting these legal foundations right isn’t just about “ticking boxes” - it’s a practical way to reduce disputes and protect your reputation as you grow.

Key Takeaways

• The biggest disadvantages of a partnership in New Zealand are often personal liability exposure, shared responsibility for partners’ actions (within the scope of their authority), and difficulties with exits and disputes.
• In many partnerships, one partner’s decisions (like signing contracts or taking on debt) can create serious consequences for the whole business - even if the other partner wasn’t involved.
• Profit-sharing, control, and workload expectations can become ongoing points of tension unless roles and decision-making rules are clearly documented.
• Partner exits are a common “breaking point” for small businesses, especially when there’s no agreed process for valuation, buyouts, and asset ownership.
• If you still want to operate as a partnership, a tailored Partnership Agreement, clear customer/supplier contracts, and strong compliance foundations can significantly reduce your risk.
• If you’re planning to scale or raise investment, it’s worth considering whether a company structure (with clearer governance and ownership rules) will suit your long-term goals better.

If you’d like help setting up a partnership the right way (or deciding whether a partnership is the right structure for your business), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.