GOING INTO BUSINESS – FORMING A PARTNERSHIP
This installment in our Going Into Business series deals with establishing a business with other people.
In the last installment we discussed establishing a company or a trust. These can also be the structure of a business when going into business with others, and the same pros and cons will apply. However, this article will focus particularly on the establishment of a partnership.
A partnership exists when two or more people (usually a maximum of 20) operate a business with a view to making a profit.
The establishment of a partnership is very simple. The partnership is not a separate legal entity, but you will need to obtain a tax file number for the partnership, as well as an ABN. The partnership will have its own separate bank accounts, but will not be taxed separately. Each partner is taxed individually, based on the income or losses they derive from the partnership.
Because the partners are the partnership, they have unlimited liability and are liable for the acts of all other partners. If one partner enters into a finance agreement in the ordinary course of the business, then all the partners are liable to pay. Conversely, all partners are entitled to an equal share of the profit generated through the business.
Whilst a partnership is very easy to establish, it is prudent to start with a partnership agreement (‘PA’). A PA can cover every aspect of your partnership and set clear guidelines as to how the partnership is to operate. Here is what a PA might cover:
Continuity of the partnership
Under the Partnership Act 1891, a partnership is dissolved on the death or retirement of a partner, unless a PA states otherwise.
If a partner retires, they will seek their share of the partnership assets and any amounts they have invested. If a partner dies, unless their Will states otherwise, the legal representative of their estate will seek to recover those assets and funds to distribute to beneficiaries.
The PA can ensure that the death or retirement of a partner does not dissolve the partnership. It can also allow for the value of the former partner’s share of the partnership assets to be made available without the undue hardship or disruption to the business.
Control of the partnership
The PA can include measures with respect to the control of the partnership and the bank account. For example, it may require two partners to sign any finance agreements or cheques.
Disparity between partners
Partners are jointly liable to pay any debts of the partnership, the result of which could be inequitable for the partner who has greater personal wealth. For example, if you are wealthier than your partners, and the business runs into financial trouble, you may find that you will be left having to carry the partnership or pay the partnership debts so as to avoid legal action. This risk may mean that a partnership is not the right business structure for you. However, a well drafted PA can help to limit this risk.
If the business fails
The PA can also dictate what is to happen if the business fails, which will help to minimise the potential for any subsequent dispute.
If you have any questions about partnerships, please contact our office to arrange an obligation-free first appointment.