It is often that we hear clients creating a business with another person mentioning that they have a partnership or want to set a partnership up. This is not correct as they usually intend on meaning they have a business partner. A partnership is a type of business structure. A partnership is similar to the way a sole trader operates whereby there is no separate legal entity implemented by a partnership. Although instead of relying on one person as a sole trader does, a partnership has a minimum of two people controlling both the business, share income and losses of the business. The partners are liable for debts and losses acquired from the business. This ultimately makes them liable for the decisions of them personally and their partner. This is a contributing reason as to why a partnership is risky, even though they are quite simple to set up.
What Are The Various Partnership Types?
Depending on where the business is located in Australia partnership business structures have different rules state-by-state. In New South Wales there are three forms of partnership under the Partnership Act.
The first type of partnership is named a normal partnership. The characteristics of this partnership include that it is the easiest to form, it does not need to be registered, it is commonly implemented between family members and it is the most common type of partnership.
The second type of partnership is limited partnership and it does need to be registered. It consists of general partners and limited partners. General partners typically have unlimited liability and are required to manage daily operations. Limited partners have nothing to do with running the business and limited liability to the amount of money given towards the partnership. Limited partnership raises capital more effectively than normal partnerships and it is suited towards small businesses amining to raise funds in avoidance of the reporting obligations of a company. Lastly, it is frequently used in development and projects such as real estate, mining and agriculture.
The final partnership is an incorporated limited partnership. This type of partnership must be registered. An incorporated limited partnership is fundamentally used for venture capital purposes.
How Do I Set Up And Maintain A Partnership?
The first step to setting up a partnership is one or both partners applying for an Australian Business Partner (ABN). It is then acknowledged that GST must be registered if the annual turnover is expected to be or is $75000. Of note, a Tax file Number is necessary to set up the partnership and partnership must register a tax return annually. All partners acting in this partnership must sign a partnership agreement drafted specifically to your business needs. It is important to seek good legal advice for drafting the partnership agreement to ensure it is correct and all parties understand. The agreement covers issues such as who makes decisions in areas of the business, income separation and what happens after a partner departs from the partnership.
When A Partnership Ends, What Happens?
The most common reason as to why partnerships end is because of bankruptcy, the partnership becomes insolvent, a partner wants to leave or the partnership ends because the expiry date discussed in the partnership agreement. The partnership dissolves if any of these listed previously occurs. The partnership agreement plays a role here now as the terms on how the partnership is dissolved is highlighted in the contract. If there is no partnership agreement then the partnership must be dissolved according to the state’s partnership legislation.
Key Takeaways
The three different types of partnerships are normal, limited and incorporated limited. A partnership agreement is integral as it avoids a great amount of stress in the future, regardless if it is with a family member or whomever. Dissolving a partnership can cause a lot of trouble if there is no partnership agreement and could end up costing a lot. Ensure each partner understands everything clear in the contract.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
