A partnership is one way to structure a a jointly owned and operated business.
What is a partnership?
It describes a business that is carried out by 2 or more entities (individuals or companies). The partners work together towards common goals and share not only the profits but the responsibilities and liabilities as well.
Partnerships are governed by the Partnership Act (state based legislation).
A partner is jointly liable for the debts of the partnership. Creditors are able to bring a court action for outstanding monies against the partnership firm as a whole (not a specific partner), and recover the monies from any or all of the partners involved.
The effect of this can be that if the business or certain partners are unable to pay debts, creditors can recover the debt from partners who have assets or cash available, to the exclusion of the others, even though they may not have been specifically responsible for creating the debt.
Additionally, a partner is jointly and severally liable for the acts of the other partners carried out in the course of the business (with some exceptions). This is because each partner acts as a type of agent of the firm and of the other partners.
There is the option for partners to be granted limited liability. Partners with limited liability however, do not hold the full spectrum of rights as other ‘general’ partners, in particular, management rights. Limited liability partners are limited in their liability to the amount of their monetary contribution to the venture.
What are the benefits?
Working in a partnership has many distinct advantages. They include:-
- The psychological and financial support of someone who shares your vision;
- Sharing the workload with someone you trust;
- Access to wider set of skills, expertise and experience;
- Simple and inexpensive to set up and administer;
- Access to greater capital, reducing debt amounts.
Are there any disadvantages?
Disadvantages may include:-
- The unlimited liability of each partner. Liability in a partnership is greater than that of a sole trader, limited liability company or a limited partner in a limited partnership.Not only is a partner responsible and liable for their own decisions, actions and debts incurred in the business, but also those of their partner/s. If their partner/s are low in cash or assets, debts may be recovered directly from the partner who is financially better off – if that is you, then you accept an inherently higher risk than that of your partners.In this respect a certain degree of trust is necessary. It is also wise to put into place internal boundaries and checks, limiting each partner’s ability to bind the firm, outside of which consent is needed from the other partners. For example, partners may have the right to place orders with wholesalers up to a maximum amount in the course of the business. Any expenses exceeding this amount will need to be agreed to by the remaining partners. Although this may not legally protect you from liability if the partners act outside of these boundaries, it may help lessen the chance of this occurring.
- Overcoming disagreements about the direction of the business or the way in which the business should be run. Unlike sole traders who enjoy unfettered decision making powers, partners need to agree on issues such as profit sharing, administration and the ongoing development and expansion of the business.
- Clash of personalities.
- Where one partner wants out but the other does not have the resources to buy their share of the business.
Recording the terms of the arrangement in an Agreement
Recording the terms formally within a document is a very good idea. This is particularly important if a dispute arises later on.
A written agreement allows you to record each partner’s share of ownership, the goal and vision of the business, how the business will be run, the rights and responsibilities of each of the parties and other practical issues regarding the everyday running of the business.
Partnership Agreements are also useful to address any unexpected issues that may arise in the future in order to minimise uncertainty and potential disputes. Such issues include how a partner can exit the business, what happens if a partner wants to sell their share of the business and procedures aimed at resolving disagreements or disputes.
To summarise, an Agreement should include:-
- Partners share of ownership;
- How profits are to be shared, equally or by some other arrangement;
- How loses are to be borne, equally or by some other arrangement;
- How the business will be run;
- The roles, rights and responsibilities of each of the partners;
- Administration, accounting, records and financial responsibilities;
- How disputes are to be resolved, e.g. by mediation, by vote, etc.;
- How partners can leave the business / share buy-back schemes;
- How the partnership can be dissolved;
- The sale of the business owned by the partners / rights of first refusal to buy partners shares and methods to determine price.
Other ways to structure your business:
- Sole trader
- Joint venture (for one-off business ventures or specific projects such as property development)
- Private company
Resources + legal kits: