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We often hear clients setting up a business with another person mention they have a partnership or want to set up a partnership. But what they really mean is they have a business partner and they want to set up a company.
Having a business partner is completely different from the legal term ‘partnership’. A partnership is a type of business structure.
A partnership business structure works in a similar way to a sole trader, in that there is no separate legal entity created by a partnership. However, instead of control resting on one person like in a sole trader, a partnership has a minimum of 2 people who both control the business and share income and losses of the business.
Each partner is personally liable for any debts and losses from the business, thus making them liable for the decisions of themselves and the other partner. Though a partnership is easy to set up, it can be risky for this reason. A common alternative business structure with more than one co-founder is a company structure.
What Are The Types Of Partnership?
Partnership business structures have different rules depending on what state or territory they are in.
For example, within NSW there are three forms of partnership under the Partnership Act.
1. Normal Partnership
- Does not need to be registered and is the simplest form
- May be used between family members for instance
- Is the most common type of partnership we see here at Sprintlaw
2. Limited Partnership
- Needs to be registered
- Consists of general and limited partners who have different liabilities and obligations.
- General partners have unlimited liability, and manage daily operational requirements
- Limited partners have their liability limited to how much money they give to the partnership and don’t have anything to do with running the business
- Better for capital raising than a normal partnership, as limited partners can act as passive investors
- Can be useful for small businesses that need to raise funds but don’t want the reporting obligations of a company
- Commonly used in creative ventures, real estate developments, mining and agricultural projects etc.
3. Incorporated Limited Partnership
- Needs to be registered
- Is used for venture capital purposes.
How Do I Set Up And Maintain A Partnership?
To set up a partnership, one or both partners must apply for an Australian Business Number. If the annual turnover is expected to be or is $75,000, GST must be registered. Your partnership must also have a tax file number.
You should also have all partners sign a Partnership Agreement that has been drafted specifically to your business’ needs. It will cover important issues such as who makes decisions in what areas, how income is separated, and what happens if a partner wants to leave.
Each year, partnerships must register a tax return. There is far less paperwork and reporting obligations in running a partnership than in running a company.
What Happens When A Partnership Ends?
A partnership might come to an end for a number of reasons. For example, the partnership becomes insolvent or bankrupt, a partner becomes bankrupt, dies or wants to leave, or the partnership comes to an end because it has an expiry date set out in the partnership agreement.
If any of this happens, the partnership is dissolved. This is where the Partnership Agreement comes in, as the terms of how the partnership will be dissolved relies on this contract. If there is no Partnership Agreement, the partnership must be dissolved according to the state or territory’s partnership legislation.
Lastly, the partners may sign a Partnership Dissolution Agreement to formally end their partnership.
What Next?
Here at Sprintlaw, we’ve spoken with a lot of clients who have reached out to a lawyer for the first time because their partnership needs to be dissolved but they don’t know where to start because they never set up a partnership agreement.
Setting up a partnership agreement can avoid a lot of stress down the track, even if you are setting up a partnership with a friend or family member. Don’t hesitate to reach out to us if you want help deciding on your business structure, drafting a partnership agreement or dissolving your partnership.
We can be reached for a free chat on 1800 730 617 or at team@sprintlaw.com.au.
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