Put simply, a partnership arises when 2 or more people co-operate the business and share the income. It is a simple and common way to run a business with other parties. Law firms, financial companies and many small businesses frequently utilise this business structure. Each partner acts on behalf of the other partners, and there is no real separation of the partners from the operating business. Partners are also responsible for their own tax and super obligations and payments.
There a several types of business structures and each comes with its advantages and disadvantages. Choosing the right one will depend on the nature of your business, taking into account things such as size and type of your business and will consequences on your tax and liability. It is important to note that within the partnership structure, there are different types of partnerships that may be opted for, depending on the business.
Should I form a partnership?
A partnership is an agreement between two or more people to enter into a contractual (legal) relationship with a view to profit. Therefore, a positive professional relationship between yourself and the other potential partners is vital. Before forming a partnership it’s important to understand whether you and the other partners have shared goals and objectives. In addition, considering whether any potential conflicts may arise and how you might mitigate against these issues is important too.
Creating a formal partnership agreement is necessary to avoid or mitigate again potential disputes and to clearly define each partner’s duties.
What’s a Partnership Agreement?
A partnership agreement is a legal document that sets out the terms of your business and protects the interests of you and and your partners.
- The name of the partnership;
- How the partnership will be established;
- The distribution of profits and assets;
- The roles and responsibilities of each partner;
- The limitations and restraints on partners;
- How to appoint a new partner and what happens if a partner leaves; and
- How to dissolve the partnership.
There are many advantages of choosing a partnership:
- Many hands make for light work. Unlike a sole trader, you will have people to bounce ideas off and who are equally committed to the success of the business;
- It’s cheaper and easier to set up;
- More capital is available and you’ll have increased borrowing capacity;
- The business affairs of partner is private; and
- If circumstances change and a partnership is no longer a right fit, you can change the business structure.
Like with all business structures, there are disadvantages that should first be considered:
- Partners’ liability for the debts of the business is unlimited;
- Each partner is ‘jointly and severally’ liable for the partnership’s debt. In other words, you will be liable for your share of the debt and in the case a partner doesn’t pay, you’re liable for their share;
- Each partner is liable for the actions of other partners;
- Personality conflict or disagreement between partners can cause problems and risk to the business; and
- Partners may have to bear the cost of assessing the value of a partnership’s assets. This occurs in the event that a partner joins or leaves the partnership.
If you and your business partner(s) are ready to go and a partnership is the right structure to suit your business needs, you can create a Partnership Agreement now.