S&A recently met with a client who excitedly announced they were “going into partnership” with a friend. They were full of enthusiasm and excited about their new business concept.
Few people enter a new business venture thinking about the potential troubles which might lie before them. All too often the romantic idea of “going into partnership” does not live up to reality once commercial aspirations and ideology between the partners differ.
Each Australian State and Territory has enacted acted legislation for governing the legal position on partnerships. In New South Wales, the Partnership Act 1892 (NSW) defines partnerships in section 1 to comprise of:
- the relation which exists between persons;
- carrying on a business;
- in common;
- with a view to profit.
Typically, in a business operated as a partnership, control or management of the business is shared.
There are advantages to setting up your business as a partnership. They can be relatively straightforward to establish and with more than one partner the ability to, for example, raise capital may be increased because the borrowing capacity of the partnership can be attributed to the borrowing capacity of each of the partners individually. Partnerships can offer employees motivation to commit to a business by providing an incentive to become a partner. Partnership combines complimentary skills of two or more people, increasing knowledge, skills and contacts. Partners may benefit from a direct distribution of profits (whilst sharing liabilities and being required to contribute to capital).
There are also disadvantages to setting up your business as a partnership. A significant disadvantage includes joint and several liability for partnership debts and other liabilities. Partners can be jointly and severally liable for the actions of the other partners even if they themselves didn’t incur/cause the liability effected by the partner responsible for them. Profits are typically shared with others even if one partner puts in less time or effort than another. Decisions are shared by partners, which has the potential for disputes and disagreements to occur, and to slow down business progress.
Although a partnership agreement is not essential, it certainly is an important step to take in formalising a business arrangement. A good partnership agreement should carefully govern the relationships between the partners covering, for example: How the business will be financed and managed; who will do what work; how new partners can join the partnership; how the profits will be distributed; how decisions will be made for the partnership; what happens if a partner retires, needs to be removed, or dies; and what happens if one or both partners want to dissolve the partnership or sell the partnership; or a receiver needs to be appointed.
It is important to get good professional advisers on your side from the inception of your business concept. Such professional advisers view your idea from an impartial set of eyes and will have your best interests at heart. They will protect your rights so you can focus on the more important stuff – making your business a success!