Going into a business partnership with some friends or associates can be a great way to get a business up and running, but how do you know if it’s the best choice for your situation? You need to be fully aware of what a partnership involves and how it differs from a company structure. Additionally, you’d need to familiarise yourself with the Partnership Act.
That’s where we can help!
What is a Business Partnership?
Put simply, a partnership is a business structure where two or more people go into business together to make a profit. It is a simple and affordable way to structure your business. It is governed by the Partnership Act 1892 No 12 (NSW) (the Act).
There are 3 types of business partnerships.
Types of Partnerships
The first type of partnership is a general partnership. This is where the partners are equal in the eyes of the law.
Each partner is equally responsible (even if they take different roles) and each has unlimited liability for the business debts. This means that if the business owes money, they will be personally responsible for paying it back. For example, the owed person can seize their assets (such as a car) in order for the money to be repaid.
So, while a partnership might be easier to set up, it comes with higher risks when it comes to repaying debts.
A general partnership requires no registration or even written agreement, although this is advisable. A partnership doesn’t pay tax on its income, but each partner pays tax on their share of the income they earn from the partnership.
You will need an ABN and register for GST if your annual turnover is over $75,000.
A limited partnership is where 1 to 20 ‘general’ partners run the business (and are liable for all partnership debts) and an unlimited number of ‘limited’ or silent partners who put in funds but don’t have a hand in running the business.
A limited partnership needs to be registered with the NSW Fair Trading. It also doesn’t need a written agreement, but it is advisable.
Incorporated Limited Partnership
An Incorporated Limited Partnership is a business structure set up for higher risk ventures and separates the business from its partners. However, it must also have at least one ‘general’ partner who has unlimited liability, so there is someone responsible for the partnership debts.
It means that some partners can be entirely protected, which attracts investors such as venture capitalists.
Benefits Of A Partnership Over A Company Structure
The latter partnership structure above sounds a bit like a company, right? But not quite.
A limited company structure protects all shareholders (so no ‘general’ partner is liable for debts) but it carries with it a lot more costs and legal and reporting obligations. That is one main reason partnerships can be attractive. Start up costs are particularly low for partnerships.
Also, partnerships have less external regulation. You have more privacy. You can focus on the core business activity and spend less time reporting.
It’s easy to change the structure later if you start with a partnership. This is useful if it’s a new venture – scaling up is easier than scaling down. It’s a lot less hassle, and less expensive.
With a partnership, you and your partners make the decisions and share the resulting profits so you’re all equally invested in making it work, unlike a company structure that can have shareholders who would have limited access or knowledge of the daily running of the business.
If the partners to a partnership are a couple, the income splitting can have tax benefits, as each partner pays tax on their share of the income earned.
On the downside, each partner is responsible for the debts of the company and this can cause friction. Make sure you have a good idea of your areas of responsibility and ground rules to start to avoid future potential disagreements.
Key Elements Of The Partnership Act
- Section 19 allows for a partnership to vary the rights and duties of each partner by mutual consent.
- Section 24 sets out many of the ground rules of partnerships, such as the following:
- All partners have an equal share in capital, profits, losses
- Every partner may take art in the running of the business
- No partner is entitled to remuneration for running the business
- All must agree to the introduction of any new partner
- The majority can rule on difference of opinions relating to ordinary business matters (but not relating to a change in the nature of the business)
- Interest earned on any excess contributions is set at 7%,
- The partnership books must be kept at the business address and accessible by all partners
- Section 25 protects partners from being expelled from the partnership by other partners, unless you had agreed that this is permitted
- Section 30 prevents partners from doing any private business on the side that competes with the business of the partnership
- Section 31 sets out limitations of the conduct of an assignee in a partnership to only earn profits but not take part in business decisions
- Part 2, Division 4 sets out rules regarding dissolution of partnerships (but not incorporated limited partnerships). We’ll go into this in more detail later.
- Part 3 governs limited partnerships and incorporated limited partnerships, specifies the need to have a written Partnership Agreement, and allows for consent to variations and majority ruling in everyday business matters in section 68.
- Part 3 Division 3 sets out rules regarding the registration of partnerships, and specifically the naming of limited and general partners
Dissolution Of A Partnership
Part 2, Division 4 sets out some details regarding the dissolution of partnerships other than incorporated limited partnerships.
Generally, unless agreed otherwise, partnerships can be dissolved by:
- Expiration if there was a set term of the partnership or a specified venture is completed
- One partner giving notice to the other of the dissolution
- Bankruptcy or death of a partner or if one partner’s action causes the other’s property to be charged under the Act for the recovery of debt
- If it becomes unlawful to continue the business operations
- If the court orders dissolution due to events such as breach, incapacity, or the partnership can only carry on at a loss (the court can rule that it’s just and equitable for the partnership to be dissolved in a range of circumstances)
It’s advisable to set up a Partnership Dissolution Agreement that sets out what will happen to assets, release from liability and how to wind up the business operations. This helps in cases of dissolution whether there’s friction or not.
What Else Do I Need To Know?
With respect to taxation,
- You do need to lodge a partnership tax return each year with the Australian Taxation Office (ATO)
- You will require separate tax file numbers (TFN) for each partner
- You each pay tax on your share of income earned
- You must register for GST if your turnover is more than $75,000 a year
Also, while it is not required to have a Partnership Agreement in the case of a general partnership or a limited partnership, it is definitely advisable. A partnership may be less formal in that you don’t need to register your business (although you do need an ABN), and there are less regulatory rules governing its operation, but there is still the potential for misunderstanding.
It’s a good idea to record the terms of your partnership to help guide partners to help with certain business decisions or in the case of disputes.
Whether you’re looking at setting up a Partnership Agreement or want some help deciding which type of business structure is best for you and how to go about setting it up, or you need to interpret the Partnership Act for a particular situation your partnership finds itself in, we have the expertise to help.
Reach out to our team for a free, no-obligations chat at email@example.com
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