In Short
- A well-structured partnership agreement is essential for a successful business partnership.
- Clearly outline the roles, responsibilities and contributions of each partner.
- Include mechanisms for resolving disputes and handling changes in partnership dynamics.
Tips for Businesses
Draft a detailed partnership agreement to ensure all partners are aligned on expectations and obligations. This agreement should cover management roles, profit sharing, decision-making processes and exit strategies. Regularly revisit and update the agreement to accommodate any changes in business or relationship dynamics.
Table of Contents
- Types of Partnership
- 6 Steps to Start Your Partnership
- 1. Consider the Scope of the Partnership
- 2. Form a Partnership Agreement
- 3. Register Your Partnership
- 4. Consider Your Taxation Registrations
- 5. Open a Partnership Bank Account
- 6. Obtain Relevant Licenses
- Key Takeaways
- Frequently Asked Questions
A small business partnership requires compatibility, trust and mutual respect to be successful. In a partnership, all partners should have similar values that align with the partnership’s overall goals and intentions. If you think a partnership is the right structure for your business, you might be wondering how to get started. This article provides a brief overview of the types of partnerships and outlines six steps you will need to follow to start your business as a general partnership in Australia.
Types of Partnership
The first thing to consider when setting up a small business partnership is the nature of the partnership. Broadly, a partnership is a business structure you can form with two or more people who agree to go into business together. There are different types of partnerships, like:
- general partnerships;
- limited partnerships; and
- limited liability partnerships.
Notably, the type of partnership structure you choose will determine the level of liability of each partner.
Limited partnerships are specialised business structures often utilised in venture capital investments. They feature a unique combination of general partners, who manage the business and bear unlimited liability, and limited partners, who are passive investors with capped liability. This structure offers flexibility in profit sharing and capital contributions, making it attractive to venture capital investors.
Registration of limited partnerships is mandatory and must be done with the relevant state or territory department, with requirements varying across jurisdictions. While they generally face fewer ongoing regulatory obligations compared to companies, limited partnerships are typically restricted to specific purposes, particularly those related to venture capital activities.
6 Steps to Start Your Partnership
Additionally, there are six key steps to start your partnership. These include:
- deciding how you will enter into partnership (i.e. as individuals or through company or trust structures);
- entering into a partnership agreement;
- registering your partnership;
- registering for tax;
- setting up a bank account for the business; and
- applying for relevant licences.
1. Consider the Scope of the Partnership
A partnership can be between two or more:
- individuals; or
- entities, such as companies or trusts.
You should consider obtaining tax advice on which of these structures may be most beneficial to you, in terms of minimising your tax obligations.
It is also worth considering that operating a corporate structure (i.e. a company or a corporate trustee of a trust) will:
- be more expensive to set up initially; and
- have ongoing regulatory requirements, whereas operating as an individual does not.
Once you have decided on the entities or individuals who will form the partnership, you should enter into a partnership agreement. This will clearly set out how you will manage the partnership.
2. Form a Partnership Agreement
A partnership agreement confirms that the partners intend to carry on business in partnership according to the terms in the agreement. This agreement should be in writing and should outline how the partners intend to manage and operate the business.
Likewise, the agreement should set out the respective rights and obligations of each of the partners, including how they will conduct business and share the profits and losses of the business. It will need to:
- include the names and addresses of the partners; and
- note the capital contributions each has made to establish the business.
The agreement should also include terms setting out:
- how the partners are going to receive the profits of the business;
- who has the authority to make decisions on behalf of the business; and
- how the partnership signs formal documents.
It should also include a dispute resolution process and procedures to follow in the event of the:
- death or retirement of a partner; or
- admission of a new partner.
Importantly, your partnership agreement should not be viewed as a static document. As your business grows and evolves, so too should your agreement. Regular reviews and updates of both the business structure and the partnership agreement are crucial to ensure ongoing protection and relevance. These reviews provide opportunities to:
- reassess the roles, responsibilities and contributions of each partner; and
- address any new challenges or opportunities that have arisen.
Furthermore, partners may want to consider including provisions for the appointment of a corporate manager in their agreement. This can provide an additional layer of protection by separating day-to-day management from the partners themselves. A corporate manager can handle operational decisions, allowing partners to focus on strategic direction while potentially limiting their personal liability for certain business activities.
3. Register Your Partnership
The next step you will need to undertake to set up your small business partnership is registering as a partnership.
First, you will need to register for an Australian Business Number (ABN) with the Australian Business Register. Secondly, you will need to register a business name with the Australian Securities and Investment Commission (ASIC). However, if you intend to trade using the partners’ names (e.g. B Smith & J Smith), this will not be necessary.
If you have a silent partner, you will also need to complete a limited partnership formation registration.
4. Consider Your Taxation Registrations
Next, you will need to sign up your partnership with the appropriate tax registrations. This might include:
- a tax file number;
- GST registration if your partnership has an annual turnover of more than $75,000; and
- pay as you go (PAYG) withholding if you intend to have employees.
As a commercial entity, the partnership must apply for all appropriate tax registrations. It will need a tax file number and may need to register for goods and services tax (GST).
If the business of the partnership has a turnover of $75,000 or more, then it must register for GST. It may be that you wait to register for GST until your business meets this threshold.
If you plan to have employees working for the partnership, you will also need to register for pay as you go withholding. This is an amount that you will retain from the pay you owe your employees that you are required to forward to the Australian Taxation Office.
5. Open a Partnership Bank Account
You will need to ensure you open a bank account for your partnership. This is important to keep track of business income and expenditure and is also essential for keeping accurate financial records. This will be critical when lodging taxation documents.
Depending on your partnership agreement, access to the partnership bank account might be limited. For example, you might decide that one partner has authorisation to access the bank account, while others have different responsibilities and accessibilities.
6. Obtain Relevant Licenses
Finally, you will need to ensure you have the correct licences to operate your business. The licences and registrations needed will vary greatly depending on the industry your business operates in. The Australian Business Licence and Information Service has a questionnaire to help you find the licences, regulations and council approvals you need.
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Key Takeaways
If you are planning on operating your business under a partnership structure, there are various factors that you will need to consider. The key steps you will need to take include:
- deciding how you will enter into partnership (i.e. as individuals, or through company or trust structures);
- entering into a partnership agreement;
- registering your partnership;
- registering for tax;
- setting up a bank account for the business; and
- applying for relevant licences.
If you have any questions about setting up your partnership or need assistance drafting your partnership documents, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A partnership is one type of business structure that is formed when anywhere from two or 20 people decide to go into business together. There are different types of partnerships, with the partnership you choose indicating the level of liability each partner has. In Australia, each state and territory has its own partnership legislation in place that regulates partnerships.
To set up a small business partnership, you should first consider the pros and cons of this business structure and decide if a partnership is suitable for your business. Once you decide to set up a partnership, you will need to form a partnership agreement. A partnership agreement should outline how the partners intend to manage and operate the business. Then, you will need to register as a partnership. This will include tax registration and obtaining the necessary licences and registrations. You will also need a separate bank account for your partnership.
A partnership is an ongoing business relationship with one or more parties with the aim of making a profit. On the other hand, a joint venture is an agreement between parties to create a product or work on a project together. A joint venture will typically end once the project is complete.
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