There are many ways in which a business can be structured, such as sole trader, partnership and a limited liability company. This article examines the partnership model – what is it and what are the advantages and disadvantages of this type of business structure?
What is a Partnership?
A partnership is an association of two or more people who carry on a business as partners. It’s often used as a business structure for people who offer professional services, such as law firms, accounting or architectural firms.
Is a Partnership the right structure for you?
Before commencing a partnership it is important to consider, amongst other things, the personalities of the people who will form the partnership, how the partners will work together, insurance requirements, the business name, and your tax and superannuation obligations. It is also important to consider what will happen in the case that one partner is injured or killed or wishes to retire – how will their share of the partnership be dealt with?
The Partnership Agreement
The terms of a partnership should be set out in the Partnership Agreement, the defining document that will determine how the partnership will operate. The Partnership Agreement should set out:
- the establishment of the partnership;
- the name of the partnership;
- where the partnership will conduct its business;
- how partners retire;
- how new partners are appointed;
- financial contributions;
- partnership drawings and the distribution of profits and assets;
- the role of each of the partners;
- insurance requirements;
- whether the partners are prohibited from borrowing from the business;
- whether the partners are to indemnify the other partners for any negligent act or omission;
- who is to manage the partnership;
- what types of matters require unanimous decisions and what types of matters can be decided on partners acting alone (for example, the limit of money each partner can draw upon);
- how partnership disputes are to be resolved;
- how the partnership can be dissolved; and
- what happens in the event of a deadlock between partners?
The Advantages of a Partnership
Some of the advantages of a partnership are:
- each partner might bring a different perspective / fresh ideas to the business, whereas a sole trader does not have that advantage;
- the start up costs of a partnership business are low;
- each partner will inject capital, making the resources of the business greater;
- the partnership will have greater borrowing capacity than a sole trader;
- an offer of partnership may help retain high calibre employees;
- partnerships have limited external regulation by bodies such as ASIC;
- it is easy to implement a different legal structure as the business grows.
The Disadvantages of a Partnership
Conversely, some of the disadvantages of a partnership are:
- the partners may be held personally liable for the debts of the business;
- each partner is jointly and severally liable for the partnership’s debts – that is, if one partner does not pay, the other partner/s may be forced to pay the defaulting partner’s share;
- there can sometimes be disharmony amongst partners and personality conflicts;
- each partner can be liable for the negligent actions of the other partners; and
- if one partner leaves, the other partners may be required to buy him or her out and value the partnership assets in the process.
In summary, partnerships can be an attractive business structure because they are inexpensive to set up and operate. However, the most important legal consideration in setting up or joining a partnership is to consider your own personal liability. A partnership is not a separate legal entity and depending on the Partnership Agreement, you could be held liable for the debts of the partnership. This could mean that your personal assets are at risk. A business lawyer will be able to advise you of your obligations and liabilities before signing or creating a Partnership Agreement.
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