Partnership agreements: why you need more than trust

Are you and your best mate dipping your toes into entrepreneurship and ready to take on the journey of starting a business together? Or are you wanting to join forces with a business partner on your own venture? Whilst a friendship can be built on trust, it is best for your individual interests to be protected under a partnership agreement when starting a business. This Business Kitz article will outline the necessary partnership agreement considerations, why a formal agreement is important, and what happens if members of the partnership change. 

What is a partnership?

A partnership is when two or more people become co-owners of a business and share both income and losses. While it can be a fulfilling and profitable experience, it is important that you and your business partner agree on terms and conditions to mitigate potential conflict or miscommunication that may arise in the future. A partnership business structure is where all partners, or co-owners, act on behalf of one another. Partnerships are advantageous as they are simple to establish, combine resources and expertise, share profits and losses according to each partner’s share, can be easily changed into a company and have privacy over their profits as they are not legally required to disclose this to the public. 

Types of partnerships

There are three main types of partnerships:

  • General partnership – each partner has unlimited liability for debts and obligations and have equal responsibility for the management of the business. 
  • Limited partnership – the general partners are passive investors who do not play an integral role in the running of the business and whose liability is limited to the sum of money they have given to the business partnership. 
  • Incorporated limited partnership – under this partnership, at least one general partner must have unlimited liability and other partners can have limited liability for business debts. Personal liability falls on the partner/s if the business cannot meet its financial obligations.

Are there any risks?

Because each partner has unlimited liability for any debts incurred, any actions or mistakes made by other partners will directly affect you, including personal differences that may lead to conflict in the management of the business. This is great if your partner makes reliable decisions, but not so great if they do not take proper precautions during business negotiations. Tax is charged based on the personal tax rate and will therefore increase along with the business income. A partnership may also restrict individual judgement or decision making and one partner cannot transfer ownership to someone outside the business without the agreement of the other partner(s). 

What should a partnership agreement cover?

There are many terms that should be formalised in a partnership agreement and it is best to seek legal advice when drafting a business document, but the key considerations that need to be made are:

  • Individual responsibilities and contributions, including investments;
  • Business name and overall purpose;
  • Details of profit and losses, including tax payments and distributions based on shares;
  • Death, injury or disability;
  • Incoming and outgoing partners (when a partner wants to exit the business);
  • Procedure of resolving disputes, including the official employment of a mediator; and
  • Selling or transferred ownership of the business.

How do I change partners?

What happens if someone leaves the partnership and wants to hand over the responsibility to someone else? Or you want to scale up your business by joining two partnerships together? When two or more partnerships merge or partnership members change, you may acquire a partnership interest. This may involve a dutiable transaction, where you’re likely to pay duty on transferred dutiable property and partnership acquisition. Certain documents must be lodged when entering into a dutiable transaction with a partnership interest, including:

  • An identity details annexure for the transferring of real property (ie. business premises);
  • A dutiable transaction statement;
  • A valuation of all assets of the partnership;
  • Any liabilities being taken on; and
  • Balance sheets pre and post transaction.

According to the Partnership Act 1891, in Queensland, a person who joins as a partner in an existing business does not become liable for the debts incurred or anything done before they were a partner. In other words, a person entering into a partnership has a blank slate, but also has a lot of new responsibilities to accept and act upon. 

It runs in the family…

What if you were always destined to take over the family business? If you are taking on a business from a family member and are acquiring business property, you may be eligible to receive a family business concession on transfer duty payments. This is unless you are acting on behalf of another person, ie. as a trustee. 

Legal advice 

It is best practice to seek legal advice to craft your partnership agreement to ensure there are no misunderstandings, grey areas and that it is legally binding in a court of law. If you need assistance during any stages of forming your business partnership our sister company, Legal Kitz, can provide legal advice. You can book a free 30-minute consultation with their experienced and highly qualified team via our website now.

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