The thought of starting a new business can be both exciting and overwhelming. There are many things to deal with and it can be hard to know where to start.
If you have one or more business partners on board, you are probably all very excited to get started. It is tempting to dive straight in and start doing business, without pausing to think about the legal formalities. This is fraught with risk, and is a common way to damage relationships, lose money, and incur significant legal liabilities.
If you've decided on a partnership structure, then a Partnership Agreement is a very important document for you to think about. This guide will give you an overview of what it does, and why you might need it.
This guide assumes that you have already decided that a partnership is the appropriate legal structure for you.
However, there are several other common legal structures in Australia. If you are not certain about which structure to use, have a look at our guide How to Choose the Best Legal Structure for your Business. The most common structures in Australia are sole trader, partnership, company and trust. These are also discussed in more detail in that same guide. Take some time to go through that guide and consider your own situation. For an overview of some things to consider when first starting your business, see our guide How to Start a Business in Australia.
If you have any uncertainties about how to proceed at this stage, it may be necessary to seek legal assistance.
A partnership is a common business structure in Australia, involving two or more people. The partners distribute income or losses between themselves, and control the business.
A partnership is fairly cheap and easy to set up, and to operate. It has minimal reporting requirements (unlike, for example, a company structure). It is a popular structure in Australia for small businesses and family businesses.
However, unlike some company or trust structures, a partnership does not offer protection from liability. In fact, a partnership goes further than this, and makes all partners liable for the liabilities of all of the other partners. This means it is very important to choose your partners carefully, as you may be liable for losses which they cause.
A partnership needs to have a Tax File Number and to lodge annual partnership tax returns that show all business income and deductions. However, the partnership does not actually pay tax. It distributes income to the partners, and they pay tax on that income at their individual tax rates.
The partners in a partnership are not employees, although the partnership can hire employees as well.
Yes, but it is usually a bad idea.
There is no legal requirement to have a written partnership agreement. Instead, it is possible to come to some kind of verbal agreement with your partner(s), about how your partnership will be run.
However, there are a lot of matters to be considered, discussed, and agreed, in relation to how the partnership will be run. If you fail to address these upfront, then they can cause significant problems down the track.
In addition, if you fail to keep a written record of each partner's contributions, rights and obligations, then memories can fade, and this can cause well-meaning partners to come to a serious misunderstanding years later.
The process of working through a written Partnership Agreement together will help to guide your discussions and will ensure that you cover the important matters. Furthermore, in many cases, it can help you realise that you and your partner were not actually in agreement on a particular matter. You might have both interpreted different things from the conversation, and might have assumed you were in agreement without having fully fleshed the matter out.
This is a common sentiment among new business partners. Naturally, if you have reached the point that you are ready to go into business with someone, you are likely to have the same ideas in regards to how the business should be developed. And of course, since you are seeing eye to eye, you feel that if problems arise down the track, you will be able to deal with them in a fair and reasonable manner.
However, it is impossible to anticipate all of the types of obstacles that might arise in future. In addition, people and circumstances can change, and memories can fade. Unfortunately, for these reasons (and many others), it is all too common for business partners, all with the best of intentions, to find themselves entangled in stressful and expensive disagreements over what has been agreed, or how a matter should be handled.
You and your partners should not think of it that way.
A written agreement is not just there to prevent somebody from "ripping off" their partners. It is a helpful checklist for guiding your conversation, so you can make sure that you've discussed all of the important matters. It is also a helpful point of reference, so that, for example, in several years time, you can come back and double check what you had decided about how certain matters should be handled.
Finally, it is valuable for when third parties enter the picture. For example, if one of the partners passes away, and their children are trying to work out what to do about their share of the partnership, a written agreement will make life a lot easier. It will help to clarify what the deceased partner actually owned, and what procedures should be followed in order to deal with their share of the partnership.
A written Partnership Agreement will usually cover the following matters at a minimum:
As you can imagine, it is difficult to address all of this without a written agreement to guide you. It is also difficult to keep track of all of the details of what has been agreed, particularly with the passage of time.
Each state and territory in Australia has a Partnership Act.
A Partnership Agreement is a contract between the partners, so general principles of contract law, as provided by the common law, may also apply.
Among the buzz and excitement that surrounds a new business, getting the legal documents in order is usually the last thing that people want to do.
Unfortunately, it is a very important step in order to set you up for success, and to ensure that you avoid problems down the track.
Our website is designed to make this as easy as possible - with simple questions and plain English explanations to help you through. Use these to guide your discussion with your partners, and to make sure that all of the important matters are addressed upfront.
As with any legal matters, if you have any doubts or concerns, seek legal advice.