When you are a sole trader, the next step for expanding your business and increasing profits might be going into a partnership together with two or more people to make a profit. What are the advantages and disadvantages of being in a business partnership? What terms should you think about including in a Partnership Agreement?
What is a sole trader?
A sole trader is you selling goods or services in your own name or under a registered business name like Jo’s Lawnmowing. A sole trader can go into business without any legal paperwork or registration at all, apart from an ABN, if the business is conducted in their own name. If Joanna uses another name to conduct business, like Jo’s Lawnmowing, then she does have to register the name with ASIC under the Commonwealth Business Names Registration Act 2011.
How do you start a business partnership?
When Joanna starts getting more lawnmowing jobs than she can handle, she might enter a partnership with her neighbour Joe. Again, they can carry on business without any written agreement or registration except that of an ABN and the business name, if they use one. Joanna and Joe are then a ‘firm.’ Partnerships are regulated by the NSW Partnership Act 1892, which defines them as “businesses carried on in common with a view for profit,” which are not corporations (s 1(1)) and where the partners share the profits of that business (s 2). Perhaps bizarrely to many people, partners in general partnerships can be corporations also. So, your company can be in partnership with another person’s company.
The NSW Partnership Act is very similar to statutes in the other Australian States and reflects the judge-made common law on business partnerships. The vibe is of completely equal sharing of commitments to ‘the firm,’ both labour and capital, and an equal sharing of the spoils. Partnerships are automatically dissolved by the death or bankruptcy of even just one partner out of many. The Act lays down rules and procedures for creating, running, and dissolving partnerships, including dividing up the debts and assets. It also lays down procedures for recovery of debts from partners which prevent the overnight seizure of family homes upon debt or death, but this doesn’t exempt them from sale. A limited partnership or an incorporated limited partnership, formed and registered under the Act, can provide more protection, and we will cover those in future blogs.
In a general partnership, you get equality and fraternity, sure, but less liberty than a liability, because partners are jointly personally liable for the debts of the firm. It is, therefore, wise to have a partnership agreement tailored to the specific needs of your business and the partners involved.
What are the terms of a partnership?
Even for a small partnership it’s best to have a partnership agreement. Such contracts usually cover –
- The business name, descriptions of the business, and any premises;
- How much money each partner will initially invest in the enterprise;
- Other arrangements for funding the business;
- Each person’s responsibilities in the business, including the skill-set and time to be allocated to the business;
- The assets of the partnership, e.g., equipment, tools of the trade, intellectual property, and customer lists;
- Where there are corporate partners, who from the corporation will personally guarantee its partnership debts;
- Whether net profits will be shared equally between the partners or in some other proportion;
- How are decisions to be made, especially on important topics, e.g., unanimously or by a majority?
- Who can control online banking and sign cheques on behalf of the firm?
- Definitions of expenses chargeable to the firm;
- Leave for partners;
- Procedures for appointing Managing Partners;
- A method for resolving disputes;
- The triggers for the dissolution of the partnership and exit strategies.
What are the advantages of a partnership?
A partnership is easy to set up with minimal costs, compared to setting up a company.
You can make a high-performing employee a partner of the firm, entitled to remuneration via partner drawings rather than wages.
A business partnership can have taxation advantages, as well as it not being compulsory to pay superannuation contributions for partners who are not employees.
What are the disadvantages of a partnership?
Each partner is personally liable for the debts incurred to the partnership, even if it was another partner that authorised the debt to the firm (s6 of the Partnership Act) unless the partnership agreement says otherwise.
Making changes in a business partnership can be tricky. It may involve dissolving the partnership and starting a new one unless you have a Partnership Agreement with an appropriate mechanism for buying out a retired partner’s interest. If there are likely to be several changes to participants or investors in the business over time, you may wish to consider starting a company instead of a business partnership.
Talk to us now about your situation. Your initial discussion with us is free, with no obligation.