Firefly Fields Festival is run by two partners who never registered a company. A storm forced this year's event to be abandoned, and the partnership now owe...

A partnership that has never been registered as a company has no separate legal identity from its owners. The partners and the firm are one and the same in law, which is what unlimited liability means.

The suppliers are owed $58,000 and the business assets come to only $21,000, leaving $37,000 unsatisfied. Because liability is unlimited, the partners must meet that shortfall from their private resources, and their savings of $90,000 are more than enough to cover the $37,000 still outstanding. The suppliers may therefore recover the full $58,000.

Limiting the claim to the $21,000 of business assets would apply to a limited company, where the shareholders' liability is capped at the amount unpaid on their shares and those owed money by the company cannot reach the shareholders' private property. That protection comes from registration, which these partners never carried out. Halving the debt to $29,000 misreads the position: partners are jointly liable for the whole of the firm's debts, so a supplier may pursue either partner for the full amount and it is then for the partners to settle between themselves. Capping liability at the capital introduced is again a company idea and has no application to a partnership.

Exam reminder: unlimited liability is the standard drawback of the sole trader and the ordinary partnership, and it is the main reason a growing business considers incorporating.