Partnerships are the key to reducing stress and responsibility within your organisation whilst maintaining ownership. Starting a business is hard enough – then there is the added pressure of working alone and not knowing exactly what to do! Sharing ownership of your business in a partnership allows responsibilities and liability to be distributed, whilst providing more freedom and flexibility. However, of course there are also limitations to onboarding a partner. This Business Kitz article will outline everything you need to know about starting a partnership.
What is a business partnership?
The ATO defines a partnership as a “group or association of people who carry on a business and distribute profit and losses amongst themselves”. Business structures of this nature are generally inexpensive to set up and operate, with the added benefit of sourcing numerous expertise and value from each partner. Costs are typically split amongst the parties of the partnership, which would be set in a pre-established partnership agreement.
What is a partnership agreement?
A partnership agreement is a legally binding document that dictates how a small for-profit business will operate under two or more people, and establishes an agreement between the parties on the certain terms and conditions of the partnership. This includes laying out the responsibilities of each partner including aspects like how much of the business each partner owns, and the potential profit and loss each partner is responsible for. The agreement also outlines how potential scenarios could affect the business, such as a death of a partner, and how they might be dealt with if they were to occur. This can also be an important resource if your partnership reaches a 50/50 deadlock.
Each Australian state/territory has its own partnership laws which dictate the guidelines and laws for those operating as a partner.
- ACT – Partnership Act 1963
- NSW – Partnership Act 1892
- NT – Partnership Act 1997
- QLD – Partnership Act 1891
- SA – Partnership Act 1891
- TAS – Partnership Act 1891
- VIC – Partnership Act 1958
- WA – Partnership Act 1895
Purpose of a partnership agreement
A partnership agreement is vital for anyone to complete prior to the commencement of a partnership. This is due to its ability to manage the relationship between the partners and clearly state the rights each partner has. The agreement is also a great form of documentation to keep all your important information including:
- Name of partnership
- Business address
- Responsibilities each partner has
- Dispute resolution methods to be used
- How partnership can be dissolved
- Each partner’s name
- The limitations of each partner
When starting a partnership, there are also several other documents that you may consider using to structure your agreement including a revenue sharing agreement and profit share agreement. Business Kitz offers numerous helpful tools and resources to help you start or maintain your business, via their subscription services, especially with all the structural changes.
Sole Trader vs Partnership
Deciding whether to operate a business as a sole trader or within a partnership ultimately comes down to the amount of control and input you would like within the business, and if you trust someone enough to aid you in operations. The following definitions outline the key elements of working as a sole trader versus a partnership, according to ABR.
Sole trading is a type of business structure that involves an individual who owns and operates an enterprise as the only owner of the business and is therefore legally responsible for all aspects of the business, including debts. As a result, the sole trader:
- Is responsible for their own super and super of any other workers you employ
- Can employ other workers cannot employ yourself
- If you have been engaged to carry out activities as an employee, you are not entitled to an ABN for that activity
A partnership involves two or more people or entities who operate and/or own a business, distributing income and losses between themselves. There are numerous types of arrangements that exist depending on the dynamics and the needs of the partners. According to section 115 of the Corporations Act 2001 the maximum number of partners that can be involved in a partnership is 20 (with some exceptions). These can include:
- Family partnership – where two or more partners are related
- Limited partnership – where liability of debts and obligations for one or more partners is limited
- ‘Other’ partnership – where partners are equally responsible for the business and have unlimited liability for the debts and obligations
What are the different types of business partnerships
There are several types of business partnerships that can be applied, and these are chosen based on the partner’s needs and ability, as well as the business.
- General partnership (GP)
- This is when all partners are equally responsible for the management of the business. These partners are personally accountable for any debts and obligations that come with the business as they hold unlimited liability.
- Limited partnership (LP)
- Limited partners are also referred to as “silent partners” in which their liability is limited to the amount of money they contribute to the partnership, meaning they are not personally responsible for the company. These partners don’t make any business decisions and typically solely provide startup funding and capital.
- Incorporated limited partnership (ILP)
- This is where partners can have limited liability for the business debt, however there must be at least one GP with unlimited liability. This means that if the business fails, the general partner is personally liable.
- Limited liability partnership (LLP)
- LLP partnerships occur when the owners aren’t held personally responsible for the business’s debts and obligations or the actions of their partners.
What are the key obligations when starting a partnership?
- Lodge a tax return with ATO annually
- Must make own arrangements for superannuation
- Business capital that is transferred to the partnership by any partner must be declared in the annual tax return
- Ensure promotional material is inclusive of the partner name
- Keep up to date on drafted material to ensure it is all under the partnership name
Considerations when choosing a partnership
If you are unsure or not whether a partnership is the best suited business structure for you and your business, these are some factors to consider:
- Is a relatively easy and inexpensive structure to set up
- There are minimal reporting requirements
- You must create a tax file number (TFN) for your business, and create a new one under your partnership if you were a sole trader prior.
- You must apply for an Australian Business Number (ABN)
- Depending on the decided partnership agreement, you will have to share control and management of the business
- You must create a partnership tax return to be lodged with the Australian Taxation (ATO) each year
- You won’t have to pay income tax on the income earned, instead, each partner will pay tax on their share of the net partner income
- Each partner must be responsible for their own superannuation arrangements
- If turnover is $75,000 or more you must register for GST
If you are considering starting a partnership within your business, but are unsure how to legally reinforce your agreements and ensure that they best suit you, our sister company, Legal Kitz can assist you. To arrange a FREE consultation with one of their highly experienced solicitors, click here today, or contact us at email@example.com or 1300 988 954.