Bulletin Series: Structuring For Small Business Part 3 – Partnership

June 22, 2018

Partnerships and small business 
A partnership exists when there is a group of people (two or more) carrying on business together. The partners of the partnership generally share the business income, losses and control of the business in accordance with their relative partnership interests.

If you are operating a business in partnership, it is important that you have a written partnership agreement.

A partnership agreement sets out the agreed rights, responsibilities, expectations and contributions of each partner.  Having a partnership agreement can help prevent disputes between the partners.

A partnership agreement should govern what happens on the death or loss of capacity of one of the partners.  For example, do the surviving partners have the option of purchasing a deceased or bankrupt partner’s share, rather than being required to operate the business in partnership with the partner’s trustee in bankruptcy or estate.

Some important aspects for you to consider if you are thinking about operating in a partnership:

Control
The control and day to day decision making for the business lies with the partners, generally in proportion to their partnership interests. Decisions can generally be made by partners holding a simple majority (more than 50%) of the partnership interests.

You should consider whether some key decisions should require agreement of partners holding more than a simple majority, for example 75% or even unanimous agreement.  Examples of these types of decisions would include: sale of a major partnership asset; incurring significant debt on behalf of the partnership; forgiving a significant debt of the partnership; and changing the type of business operated by the partnership.

If the partners are happy to delegate some aspects of day-to-day control of the business to one of the partners, a partnership agreement can allow for the appointment of a managing partner.

There may be income tax, capital gains tax and stamp duty implications in transferring an interest in the business to a new partner you wish to introduce into the business.

It is important that each partner have a properly drafted will and enduring power of attorney to effectively pass control of a partner’s share of business to the right person if that partner were to die or lose capacity.

Taxation
Each partner will be required to pay tax on their share of the partnership income. There is no flexibility for you to distribute business income to other members of your family who might be in a better position to manage the tax payable on that income.

Costs
A partnership structure is relatively simple to run and operate. The additional start-up costs for a partnership structure would include the costs to prepare a partnership agreement.  There are minimal annual administrative and accountancy fees with this type of structure.

Risk
In a partnership structure, each partner is jointly and severally liable for the debts of the business.

This means each individual partner can be held liable for all the debts of the partnership.

Therefore, if the partnership business goes into debt, you, as one of the partners, will be personally responsible for all this debt.  Similarly, if a claim is made against the partnership business you will be personally liable for all of that claim.  This might result in the loss of your personal assets to pay what is a joint partnership debt.

To find out ways to mitigate the risk to your personal assets and options for you to distribute business income to other family members who might be in a better position to manage the tax on that income, continue reading our Company and Trust structures publications.

Please get in touch with us if you would like assistance in preparing your partnership agreement or restructuring your partnership business.

To find out more about a partnership structure, please contact our commercial team on 07 4671 6000.

In our next bulletin we will discuss about the structure of a Company.

To review Part 1 of this bulletin series, click here – Overview of Different Structure Types

To review Part 2 of this bulletin series, click here – Sole Trader