You and your best mate have decided to go into business together. I mean, you’ve done everything from travelling the world together to rescuing them from an awkward date; you trust each other and have never needed a legally binding document; so why start now… Right? Wrong. Whether it’s a multinational corporation, or opening a local pub it’s important to protect the individual interests of you and your partner(s).
What is a partnership?
Partnerships are legally binding agreements between two or more parties. From profit sharing, dispute resolution and capital contribution, these agreements set out the relationship between partners, in turn avoiding any future conflict.
Partnerships fall into two categories; general or limited partnerships.
A general partnership is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debt and obligations that may incur.
A limited partnership is where one or more partners for the debt and obligations of the business are limited; each partner’s liability is usually in proportion with their investment.
Here are some of the things you must consider when drafting a partnership agreement.
What should a partnership agreement include?
1. Business Name and Purpose
Include the name of the company and any other names the company might be operating under. Remember to enclose a statement outlining the company’s purpose, but try not to make it too specific, to allow for any future growth or change of direction.
2. Partner Contributions and Responsibilities
What is each partner bringing to the table? Discuss cash investments, physical property or intellectual property, and what restrictions, if any, are on these assets.
It is also important to set out the responsibilities and expectations of each partner. List out the different parts of the business and decide who is going to be in charge of each respective area.
3. Distribution of profits and losses
How will profits and losses be distributed, and on what basis? This should be clearly outlined in your partnership agreement from the beginning to avoid any tax issues arising in the future.
4. Decision Making and Dispute Resolution
Set out the decision-making process. Who will have the final say? What will happen when you and your partner disagree? For example, enforce a unanimous decision for major decisions or employ a mediator. Either way, make sure it’s included.
5. Death and Disability
It happens. If one partner dies or suffers a disability, how will the other(s) carry on the business. Who will make decisions in their place? Predicting the unpredictable is key to protecting your business.
6. Partner Exit
Consider voluntary and involuntary exits. What happens if a partner wants to leave the partnership and pursue other interests? Under what circumstances can a partner be forced to leave?
7. Selling the Business
When can the business be sold, and under what circumstances? Here is where a business sale agreement comes into play.
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Tax Implications
A partnership has its own Tax File Number (TFN) and must lodge an annual partnership return showing all income and deductions of the business. Each partner pays tax on the share of profit they receive.
A partnership has its own Australian Business Number (ABN) and must be registered for Goods and Services Tax (GST) if its annual turnover is $75,000 or more.
To learn more, check out the ATO website
Now what?
Agreeing on how to handle situations before they arise are key to avoiding conflict within your business. Determine whether a partnership agreement is for you and put time and thought into nutting the details out. Remember that you can always change your business structure in the future.
Keep in mind that partnerships are state-regulated and there may be differences depending on where you live.
Ready to go? Start drafting your Partnership Agreement here.
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