How to Structure a Business Partnership
Ready to start a business partnership? Read this guide to find out everything you need to know about how it should be structured.
The structure of a Business Partnership is a critical factor in its operation as a whole; it implicates the amount of tax each partner pays, each partners liability, and allocates the control each individual has in the partnership.
The Partnership Act 1895 (NSW) provides an accessible criterion that defines the different structures that a partnership can take on. Most importantly, it states that a partnership “involves a valid agreement between the certain parties to carry on a business in common with a view of profit.” It is also worth noting that other States have similar provisions in their respective Partnership legislation.
If you would like more information on partnerships before reading this guide, check out ‘What is a Partnership Agreement?’ to obtain a better understanding of this business structure.
1. Number of Partners
Generally, a partnership will be formed by two or more people and up to 20 people, with exceptions.
Depending on what sort of business you are creating, you should try to predict the liabilities that it will incur in the future. This research will help you decide how many partners you should have and/or if you should establish a Business Partnership at all.
In addition, it is common to have issues within your business due to disagreements between partners. Again, you should firmly decide upon the purpose of your business, and more importantly, the role of each of your partners in order to decide upon the number of partners that will best suit the goals of your business.
2. Type of Partnership
Choosing the right partnership for your business is essential for the allocation of liability, profit, property and ideas. The Partnership Act outlines three main types of partnerships.
Note: all partnerships require a Tax File Number as well as an ABN. In addition, a partnership is required to pay superannuation for its employees.
A normal partnership can be utilised if you wish to run a small business with a simple business model e.g with family members or a few friends. Partners will have equal rights and responsibilities. Individual partners will have the power to bind the partnership in any legal obligations.
This type of partnership does not pay income tax on profit, rather, each individual partner lodges their own tax return based on their reported income. This type of partnership does not need to be registered with the NSW Department of Fair Trading. However, if you a carrying out the partnership under a business name, then the name has to be registered.
For more details surrounding partnership taxation, visit the ATO website.
A limited partnership can be utilised if you wish to have at least one limited partner and one general partner which may be a person or a company.
A general partner can be liable for the debts of the partnership but takes a more active role in the partnership as a whole. Only 20 general partners can exist at one time (subject to exception).
A limited partner has liability for the debts of the this type of partnership only to a limit, however, they play less of an active role in the partnership as a whole. They cannot take part in managing the partnerships business and cannot bind the rest of the partners.
This type of partnership must be registered; because of this, it is a separate legal entity and is taxed as a single entity.
To read more into registering a limited partnership, visit the ABLIS website link.
Incorporated Limited Partnerships
An incorporated limited partnership can be utilised if a limited partnerships wants to create a distinct company out of a few of its partners in order to gain venture capital. Venture capital is normally perceived in high growth startup companies. The Venture Capital Act 2002 comes into effect in order to structure capital investments that filter through this type of partnership.
In an incorporated limited partnership, the each partner has no liability for the debts of the partnership or its general partners. In addition, they cannot be active in the management of the partnership.
This type of partnership must be registered properly. It is required to register with the NSW Department of Fair Trading and can have unlimited partners but only 20 general partners. It can also be registered under the Venture Capital Act so that it can be taxed similarly to that of a normal partnership.
To read more into registering a limited partnership, visit the NSW fair trading website for information on incorporated limited partnerships.
3. The Roles and Rights of the Partners
The assignment of responsibilities in a partnership is crucial in the partnerships future growth. Such responsibilities should be decided upon and mapped out.
Recommended roles for partners include:
- Client development
Each role should be filled by the most capable partner suited to that role. The key to an effective partnership is choosing the right people to embody the recommended roles.
Each partner must then be allocated a percentage of the ownership of the business as a whole. This may be different for each partner based on their initial capital contribution as well as how they will divide profits and losses. In addition, it is important to note the rights of each partner in writing up checks and drawing from the join partnership bank account.
‘We shape our buildings; thereafter they shape us’
Structuring a business partnership is a vital step towards the successful management of your business as a whole. Predicting the liabilities that your partnership will incur will strengthen the character of your partnership in addition to increasing its longevity.
Tristan is currently working as an intern at Lawpath. He is studying a Bachelor of Science in Information Technology and a Bachelor of Laws at UTS. Tristan is passionate about the innovations that legal technology can bring to both the current and future legal framework.