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Going into business with close friends or associates as partners is, for many people, an ideal way to realise their entrepreneurial dreams.
Like sole trading, a partnership business structure offers many advantages. The most significant of these is the comparatively simple operation and methods of setting up and ending the partnership. Compared with the extensive administration involved in forming a company, a partnership involves less regulatory compliance and less overall paperwork. A partnership can be established by registering an Australian Business Name (ABN) and Tax File Number (TFN) for tax purposes.
But unlike a company structure, a partnership does not offer the protection of creating a separate legal entity. Therefore, partners carry much of the risk if things don’t go to plan. This means a partner’s personal assets (for example, a partner’s house or car) could be used to pay debts of the partnership. Partners also share the accountability for each other’s mistakes in the partnership.
In Queensland,partnerships are subject to the legislative provisions of the Partnership Act 1891. Although at first glance this act may seem overwhelming, below are a few key considerations for anyone considering entering into a partnership.
What are the key features of partnerships?
- A partnership is a business structure made up of two or more people who carry out business with the intention of making a profit.
- A partner cannot transfer their interest in the business to someone outside the partnership unless the other partner(s) agree.
- Each partner maintains a right to take part in the management of the business.
- The essential nature of the business cannot be changed without the consent of all partners.
- A partner is obliged to inform other partners of any material conflict of interest, such as doing business outside of the partnership which may be in competition with the partnership’s operation.
- Unless otherwise stated, all partners are equally responsible for the business, meaning each carries unlimited liability for any debts incurred by the business. Partners are also “jointly and severally” liable in the partnership.
What is ‘joint and several’ liability?
‘Joint and several’ liability means that as well as their shared liability for all of the debts of the partnership, partners are also personally liable for all debts incurred by or in the name of the business. This includes debts incurred without the knowledge or authority of other partners, such as when one partner makes a deal with a third party to supply the business, for example.
Under the Partnership Act, a partner remains liable for debts incurred during the time that they were involved in the partnership even after they leave the business. New partners are not liable for debts or obligations incurred before their arrival into the partnership, unless they agree to be.
Venture capital businesses and other high-risk enterprises sometimes form a particular form of partnership known as an incorporated limited partnership which, unlike a general partnership, separates the business entity from its partners. In this form of partnership, at least one general partner (but not more than 20) will retain unlimited liability for debts incurred by the business. Under the Partnership Act this form of partnership must have a written partnership agreement setting out the rights and responsibilities of each partner.
How is tax treated in a partnership structure?
Whilst a company pays tax because it is treated as having a separate legal “personality”, in a partnership each partner must individually pay tax based on their share of its income and assets. Therefore, income and losses are apportioned on the basis of each partner’s shareholding in the business.
Is a partnership agreement necessary?
It is recommended that any partnership entered into should be governed by a partnership agreement. Ideally this agreement is a clear, well-drafted document that sets out:
- the share of the partnership held by each partner;
- the partnership’s assets;
- how profits are distributed;
- how liability is dealt with between the partners;
- how the partnership is ended or terminated;
- the procedures for resolving disputes between partners.
Along with a partnership agreement, proper records of meetings held by partners should be kept in order to document important business decisions. These are essential if there are subsequent disagreements about the direction or termination of the partnership business.
If you have questions about setting up a partnership, or need help in drafting a partnership agreement to deal with all the possibilities that could eventuate in the business, contact
South Geldard Lawyers of Rockhampton. We have the expertise to guide you on all business structures, including the benefits and drawbacks of partnerships. Contact us today on (07) 4936 9100 or through our website to arrange an initial, fixed fee consultation.
It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.
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