Overview of a Partnership
If two or more people carry on business together other than through a company, the business is a partnership.
Frequently people do this without any written partnership agreement in which event in Queensland at least, the provisions of the Partnership Act apply. It is prudent however for the parties to carefully consider how they will want the partnership to operate and to enter into a Partnership Deed early on.
Things that need to be considered include the proportions of the partnership held by each partner, contributions to capital, contributions to expenses, division of profits, pre-emption rights to buy out the interest of a retiring partner and arrangements in the event of death or TPD of a partner and insolvency.
These agreements deserve careful consideration as they can be the foundation of a long and prosperous enterprise. Equally, a sound agreement should include mechanisms for dealing with the resolution of disagreements.
The bedrock of a partnerships is that each partner is jointly liable for all the debts and liabilities of the partnership and they share profits according to the extent of their partnership share.
A creditor may therefore recover a debt in full from any partner – even if the partner as a very minor share in the business – although that person may seek contribution for payment of part of the debt from other partners to the extent of their respective partnership shares (assuming they are not insolvent).
Transfer of partnership shares is not as easy as the transfer of shares in the company. That is because the admission or exit of a partner – even though it is contemplated in the existing partnership agreement – has the practical effect of creating a new partnership. Legal and accounting overheads in relation to the transfer of partnership shares are higher than case of company shares.
A partnership involves two or more people (up to 20, with some exceptions) going into business together with a view to making a profit. – Business.gov.au
What types of Partnerships are there?
There are 3 types of partnerships:
- General Partnership (GP) – Where all partners share profits according to the extent of their partnership share and each has unlimited liability for the debts and liabilities that may arise. General partnerships do not require any form of registration except for a business name, should the partners decide to trade other than under their own names.
- Limited Partnership (LP) – This consists of at least one general partner with unlimited liability and at least one limited partner who is financial responsibility is limited to the amount specified in the partnership deed. Limited partners are not entitled to take part of the management of the partnership. Limited Partnerships are required to be registered as are changes relating to them.
- Incorporated Limited Partnership (ILP) – This special category of partnership has separate legal entity status (like a company) where the general partners have unlimited liability and that of limited partners is limited to the amount they are prepared to risk. This category of partnership is reserved for venture capital arrangements that receive tax benefits under federal legislation. Limited partners are not entitled to take part in the management of the partnership.
What are the benefits and requirements of forming a Partnership?
A partnership has the following benefits and requirements:
- they are relatively easy to set up and maintain;
- they have minimum requirements for accounting and reporting;
- they require an Australian Business Number (ABN);
- they require a tax file number (TFN);
- profits, risk and management responsibilities are shared among the partners in the manner specified in the Partnership Deed;
- partnerships do not pay income tax on partnership income — each partner pays tax on the net income attributable to their partnership share;
- if the turnover is $75,000 or more, they must be registered for GST.
Potential pitfalls in a Partnership
- a partnership is not a separate legal entity. Each partner is fully responsible for the debts and liabilities that other partners, with or without their knowledge, have lawfully incurred;
- dispute resolution can sometimes only be achieved by dissolution of the partnership;
- ownership changes generally require the establishment of a new partnership.
Other factors to consider
To avoid disagreements at a later date, it is best to have the agreement put into writing by a competent business lawyer. Our business structure lawyers can draft a formal agreement that outlines:
- The position and level of authority of each partner;
- The financial contribution of each partner;
- A dispute resolution system;
- Procedure to cancel or withdraw from the relationship.
Formal agreement is important because personal liability for each partner is unlimited. If the business fails and a partner can’t afford to pay their share of any debts, the remaining partners will be held liable for the partnership debts.
The partnership does not pay income tax. Rather, each partner pays tax on the share of the income received by each partner.
Choosing the right business structure – Is Partnership the right option?
Choose the one that best suits your business needs when you settle on a framework for your company. Research that choice carefully. The structure of your business is relevant to:
- the licences that the business will need;
- the level at which profits will be taxed;
- whether you are an employee (as in the case of a company director) or a business owner;
- your potential future responsibility;
- how much control you have over the business;
- ongoing compliance and accounting overheads.
You can choose from a number of structures when you start or expand your business. Australia’s four most common types of business structures are:
- Sole trader – The simplest structure allows you to have full control;
- Partnerships – Consisting of 2 or more individuals or companies;
- Company – More complex; your liability is limited because it is a separate legal entity;
- Trust – Where a trustee is in charge of a business that is conducted for the benefit of the trust beneficiaries.
Seek advice from a professional business consultant, business structure lawyer or accountant before deciding which business structure to use.