A partnership is a business structure comprising of two or more people who have agreed to engage in business together. Partnerships are built on trust, and the parties to this binding agreement cooperate to distribute their income and losses in line with their mutual interests. Read on to find out more.
What Does A Partnership Mean?
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 not costly to set up and operate, and costs are normally split amongst the parties to the partnership.
A business partnership is a legal and formal arrangement in which two or more individuals or entities come together to operate a business for profit. In a partnership, the individuals or entities involved (known as partners) contribute resources, such as capital, expertise, labor, or assets, to the business. Partners share in the profits, losses, and decision-making responsibilities of the business based on the terms outlined in a partnership agreement.
Key characteristics of a business partnership include:
- Shared Ownership: Partners jointly own and operate the business. Each partner has a specific ownership stake, which may be equal or based on their contributions and agreement terms.
- Profit Sharing: Partners typically share in the profits of the business according to the agreed-upon allocation in the partnership agreement.
- Joint Decision Making: Partners collaborate in making important business decisions, and their input and authority levels are defined in the partnership agreement.
- Resource Contributions: Partners may contribute various resources to the business, including capital, skills, knowledge, and assets.
- Shared Liabilities: Partners are generally personally liable for the business’s debts and obligations, although this can vary depending on the type of partnership (e.g., general partnership, limited partnership, limited liability partnership).
- Management Roles: Partners may have defined roles within the business, but the extent of their involvement can vary based on the agreement.
- Flexibility: Business partnerships offer flexibility in terms of structuring the agreement, profit-sharing arrangements, and management responsibilities.
How Do I Form A Partnership?
As a general rule, there are no specific formalities that must be complied with when enacting a partnership between two or more parties. Notwithstanding, having a written agreement surrounding the structure will assist the parties in determining their roles and responsibilities, so as to prevent misunderstandings.
What is the Maximum Number of People in A Partnership?
Section 115 of the Corporations Act 2001 states that the maximum number of partners that can be involved in a partnership is 20 (with some exceptions).
What are the Advantages and Disadvantages of A Partnership?
As with all business structures, there are advantages and disadvantages. Advantages include:
- They are considered easier and less expensive to set up;
- Profits and losses are simple to administer;
- They are not a company and therefore do not have to engage with the company responsibilities, such as disclosing their profits to the general public;
- Profits and losses are shared;
- Combining the resources and expertise of the parties; and
- Changing the business structure is simple.
- Parties are all individually liable for business debts;
- A party cannot transfer ownership without the approval of other parties;
- Conflicts may arise and interfere with business operations;
- Lack of regulation from government; and
- A limited ability to raise capital.
Is A Partnership A Company?
A partnership is not a company, meaning it is not a separate legal entity. Companies must go through the incorporation process to become recognised as an entity in law, however, partnerships are not required to go through this process. Although it may seemingly save time, by not becoming a separate legal entity, the parties in a partnership are liable for any financial obligations that may arise. Thus, the partners will be liable to pay for any incurred debts should the business venture fail.
How Do I Build A Good Relationship With My Partner/s?
The key characteristics of a strong partnership include:
- Clear and specific expectations;
- Great communication;
- Common business values; and
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