What is a Partnership?
A partnership is a type of business structure involving two or more individuals. In NSW, the Partnership Act 1892 (the Act) defines a partnership as ‘the relationship between persons who are carrying on a business in common with a view to profit’. There are three types of partnerships, according to the Act, a normal partnership, limited partnership and incorporated limited partnership. However, it is important to note that the laws relevant to partnerships differ between each state.
Is it allowed?
Partners are able to borrow money from their partnership. Partners are also business owners in a general partnership and hence can decide what they do with their money. This includes lending the business’ money or borrowing money from the business. This process is similar to shareholder loan.
It is important to note the difference between shareholders and partners. The owners of a corporation are shareholders, while the owners of a partnership are partners. The distinction is important for loans as it differentiates the ownership interests. A shareholder has shares of stock for a corporation and a partner has a percentage of the whole business.
Borrowing Money from a Partnership
A partner can borrow money from their partnership, by arranging a partnership agreement. The partner does not necessarily need to pay back the money as there has already been an allocation to you as an owner, in your capital account. Each year, a partnership must allocate profits and losses to the partners according to their net profit or loss. The partnership may choose to not distribute the entirety of the profits every year. However, the money is still credited to each partner through their capital account. The capital account represents a partner’s ownership in the business. Usually, a partnership distributes profits to partners once a year. However, it also allows for a partner to withdraw money against the balance of their capital account or against future profits at their discretion.
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Lending Money from a Partnership
As a partner, you have the power to decide what money is put in or taken out of your business. Therefore, a partner can also lend money. Whilst there are no regulations surrounding the loan of partnership money, it is advised that a loan agreement is set up. A loan agreement between the lender and lendee can prevent any financial difficulties. It is also useful to ensure that the outflow of money is properly accounted for in the partnership’s financial records. The agreement can outline the amount of the loan, interest rate and the date that the money must be paid back.
Like any loan, there is the risk of losing the money. If the business or individual fails or loses the money, the loan will be classified as a business debt and will decrease the overall profit for the partnership.
Conclusion
In short, a partner can borrow money from their partnership. However, it is important to have a set arrangement in place to avoid any issues. If you have any further questions, contact a business lawyer today.
