Starting a business partnership can be a great way to distribute profits between people without registering a company. However, every partnership is different and requires a tailored set of clauses set out in the partnership agreement. These clauses will need to cover how income is distributed, how the partnership is to operate, and the recourse if anything goes wrong.
First things first, there are two types of partnerships of which you can establish. The first is a general partnership, where every partner is involved with running the business on a daily basis. The second is a limited partnership. In this case, one or more partner(s) are personally liable for the debts of the business and they manage the daily operations of the business; the other partners are passive.
Why Choose a Business Partnership?
Partnerships are much easier and less expensive than setting up a company. There is always the option to change to a company at a later date, and the process is relatively simple. Conversely, a company cannot be converted into a business partnership without deregistering the company first – meaning you would pay more in the long run to transform a company into a partnership.
Partnerships also offer a greater deal of privacy than companies. Notably, a partnership does not have to account for its profits and business activities to the same extent that registered companies do.
It is inevitable that with every type of business venture, there are disadvantages as compared to other business structures. The key is balancing these with the advantages that each type of business offers. The major one for a business partnership is that every partner is jointly responsible for debts that have been incurred by other partners (unlimited liability). This means that if your business runs into debt, the partners will be directly responsible for these.
If your partnership is lucrative, the tax you pay will increase as partnership income is included by the ATO as part of your individual tax rate.
There are numerous legal considerations you will have to make when establishing a partnership such as:
- The laws that are applicable to you. These depend on what state the partnership will operate in. The Partnership Act of each state in Australia outlines specific provisions dealing with business partnerships, liability, property, rights etc.
- The ATO requires partnerships to obtain a separate Tax File Number.
- As with any business, an ABN is essential.
- When registering with ASIC, registering your business depends on whether your partners are individuals, companies, or a registered or incorporated body. You will need to provide details of these partners when registering.
- If your annual income turnover is going to be over $75,000 you will also be required to register for GST.
- This guide can provide further information regarding legal documents for partnerships.
A formal partnership agreement is essential when creating a business partnership. It’s a good idea to seek the advice of a lawyer to oversee the creation of the agreement. You may even want to consider getting separate lawyers for each partner to avoid any potential conflicts of interest.
Your partnership agreement should include:
- An outline of joint and personal liabilities and responsibilities
- Distribution of tax and profits
- Clauses which cover the termination of a partnership, if the partnership decides to register as a company, or if one partner leaves
- Dispute resolution strategies
- Voting requirements
- Procedure for removing partners. For example, a misconduct clause
- The authority and responsibilities of each partner, their roles within the partnership and their expected contributions
LawPath have a range of business lawyers who can assist you with your partnership agreements. Although a lawyer can be very useful to identify issues and mediate between partners, you and your partners should aim to create a business structure that is right for you and that all partners are happy with. Make sure each partner agrees to and understands the terms of the agreement before signing.
A partnership agreement can be an inexpensive and effective way to run a business without the costs of registering a company and its associated tax obligations.
Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about establishing a partnership, customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.