Business Structure Guide: Partnerships

When choosing a business structure, you should consider the nature of your industry, goals and growth. Below, we continue to step you through the various business structures, this time turning our attention to partnerships, to assist you in deciding which best suits your needs. A partnership is a business structure involving more than one person carrying on the business in common with an intention to profit. The Partnership Act 1892 (NSW) governs the partnership structure. 

Advantages

Ease of Establishment
You can set up a partnership via:

1. A written contract;
2. An oral agreement; or
3. By the conduct of the individuals.

A partnership is created based on an understanding between partners (expressed or implied) to work together in the same business to make a profit to be shared between them. The setup costs of partnerships are low and having a competent lawyer draft your partnership agreement will ensure your relationship is clearly mapped out.

Management and Control
Each partner can manage the business and bind each other to the actions of the partners (unless otherwise stated in the partnership agreement).

Privacy
A partnership relationship renders both partners bound to give full disclosure of material information to each other and to act in good faith in the best interests of the partnership as opposed to their own interests. There is no obligation in partnerships to disclose financial information. However, limited partnerships have more onerous disclosure obligations.

Disadvantages

Liability
The basic rule of a partnership is that each partner is both a principal and agent of the business. This means that each partner may incur liabilities on behalf of the business, and each partner may be liable for the debts incurred on behalf of the business by the other partners. Partners are also jointly liable for contracts entered into on behalf of the partnership.

Capital
Partnerships cannot raise funds from the general public. Partnerships rely on the partners’ savings or loans, or on business profits to finance growth. However, unlike a sole trader, a partnership formed for gain can have a maximum of 20 partners, thus increasing the pool of funds available.

Continuity of Existence
Partnerships can end when a partner dies, retires or goes bankrupt unless there is a partnership agreement to the contrary. Partnership agreements may provide the course for the business to terminate at a particular time and will usually provide for the distribution of the business’ assets. The court can, on certain grounds, also terminate partnerships.

Taxation

Each partner bears responsibility for their own taxation affairs and payments.

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Ultimately the best business structure for your business depends on the needs, wants and future of your business. You should research which structure best suits your business and importantly, if you have any questions, ask! Get in touch with our business structuring experts on 1300 544 755.