Being a sole trader in your business has its advantages. Full control over all decisions is a pretty attractive benefit. A partnership has its benefits too, especially when full control becomes too much. So why not add a partner to your business to lighten the load?
Adding a partner to your business can be a piece of cake. Or, it can be incredibly difficult. It all depends on where you start off. For example, if you’re running things solo, then it might be as simple as submitting a form with the Australian Securities and Investment Commission (ASIC). If you’re already in a partnership, it all depends on your agreement. Let’s have a look at both of these scenarios and what financial and legal implications adding a partner will have.
Adding a Business Partner as a Sole Trader
If you want to add a business partner (or remove them in some cases), then you need to let ASIC know. There are some cases where partners cannot be added or removed, such as when the business name is held by a joint venture partnership.
Adding a partner through ASIC is fair easy thanks to their online accessibility. Simply log in to ASIC Connect and follow their prompts and you’ll be on your way to becoming a partnership! After partner details are updated, remember to update your business name holder name to reflect the new partners.
It is important to know that changing your sole trading business to a partnership has many implications you may not be aware of until they come around. Firstly, changing your business structure to a partnership affects the entire business structure. It can affect how decisions are made and the mechanisms that need to be set in place for when disputes arise. Speaking to a business lawyer about how you can best deal with these changes might be in your best interests.
Regardless of your reason for entering into a partnership, the most important thing is to clearly define what roles each of you will have going forward in the business. It’s one thing to love the idea of getting into a partnership together with a friend over drinks. It’s another when it comes down to business. Short-term decisions can have long-term effects.
How Do I Make Sure Everything Runs Smoothly In The Long Term?
When teaming up with a partner, regardless of how competent they are and how much you trust them, you should write up an agreement. Drawing up a business agreement ensures everybody understands their roles and obligations in business. It can also provide a method for resolving disputes if it ever comes down to it. The early stages of adding a business partner are filled with optimism. However, realism is always necessary when it comes to your business and its long-term survival.
Lawyers are small to medium businesses’ second-most used professional service. However, startup businesses often avoid legal documents because founders prefer to spend their limited resources on sales and marketing. While sales and marketing is key to the success of a business in the short run, comprehensive legal advice can save countless resources in the long run. So when writing up your new partnership agreement, it’s best to speak to a lawyer to make sure you cover all bases. Alternatively, you can simply fill out some details and get a personalised agreement written up here.
What Should This Agreement Include?
The partnership agreement should cover a number of things. A more detailed guide of what is in a partnership contract can be found here. The most important areas to consider in your agreement will cover two things.
First, what the duties and limitations of each partner are. For example, who will write up the financial statements? Who will undertake marketing operations? If everyone knows what their roles are, there’s less room for dispute.
Second, the rules concerning disputes. More than a few friendships and families have gone sour through bad business. Set out from the onset what your resolution methods are. It might benefit everyone to have an exit strategy, too. It might sound harsh to plan the divorce before the wedding, but everyone should know what to expect if things can’t be fixed.
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Adding a Business Partner as a Partnership
For the most part, all of the same things apply to partnerships adding a partner as they do when sole traders add partners. The key difference is whether the partnership agreement allows you to add a partner.
When creating the original partnership agreement, there should have been a part that defined whether or not another partner could be added. If the agreement does not prohibit (expressly or impliedly), it should be safe to add a new partner through ASIC. To avoid later disputes, this should part of the agreement should be amended.
If the agreement does not allow the addition of extra partners, then this may need to be changed. All partners must agree to the addition of another partner. Once agreed upon, the agreement must be amended. If the agreement does not allow for a new partner and you add one anyway, this may become an issue if a dispute arises.
Conclusion
Before you add partners to your company, you should first understand what financial and legal effects this may have on your business. Everybody should understand their obligations and duties to the business. But before you add partners to your company, it’s best to first figure out exactly what effects this might have on your financial and legal situation. Speak to one of our business lawyers if you have any questions about adding a partner to your business.
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