Operating business as a business partnership can be beneficial because the partnership relationship allows you to pool knowledge, resources and work effort. However, whenever people go into business together, there are risks of disagreements down the line. You not only need to be concerned about your ongoing working relationship with your partner, but you also need to consider what would happen if anyone needed to leave your business partnership.
Common Business Partnership Issues to Avoid
When you are embarking on a business partnership, there are some mistakes that could doom your fledgling company before it even begins. These are some of the most common business partnership issues to avoid:
- Failing to negotiate a written partnership agreement before you get started. There will inevitably be conflicts when groups of people work together. The key is for those conflicts to be healthy, rather than to undermine the success of your business. A written partnership or shareholders agreement should make everyone’s roles within the organization clear and should provide an outline for how conflicts are to be resolved. When everyone knows their role, this can keep disagreements from arising in the first place. When a difference of opinion does inevitably arise, you can also refer to the partnership agreement for details on how to resolve it.
- Failing to focus on how ownership is divided. Every partner should know exactly how much of the business he owns and how profits are distributed. Owners who know exactly what they are working for are likely to be more motivated to the success of the business. Furthermore, some of the most difficult fights to resolve are about money. You want to ensure that it is clear to all involved parties exactly what their financial interests are in the business.
- Putting your personal assets at risk. When you start a business partnership, you could become personally liable for the debts of the business as well as for any judgments that are awarded against your business in litigation. Under Australian law, each partner is jointly and severally liable for business debts and liabilities. If you have a corporate structure this will be different but many creditors will require personal guarantees so in practice the effect is the same. This means even if your partners are the ones that make bad financial choices, you could become responsible for personally paying for those mistakes. You want to make sure you explore ways to limit your personal liability so you do not face a financial disaster if one of the partners makes a bad decision when operating the business partnership. If you are concerned about taking on the debts of the business, you may want to consider the appropriate structure of your business and asset protections measures.
- Not planning for the future. Everyone starts a business with good intentions, but life happens. A partner could become disabled, could pass away, or could divorce. Any of these things could make the future of your company uncertain. What happens if one of the partners dies, does he or she get to leave the business partnership to whomever he wants? What if you do not get along with that person? If someone divorces, is there a risk that his or her ex-spouse could get an ownership share in your business. You need to account for these things and create a buy-sell agreement that ensures you have control over what happens with your business partnership in the future.
- Not fulfilling legal requirements associated with forming a partnership. In general, you are required to register the business name of your partnership with the Australian Securities and Investments Commission. Registration is mandated unless the surnames of all partners involved are used in the name of the business. Registration is just one legal mandate that you must fulfill before you begin operating as a partnership. An attorney can provide you with comprehensive information about exactly what you need to do to comply with the law.
- Not planning properly for taxes. Business partnership profits and losses pass through to the partners/owners who pay the taxes on their personal return. Do not count on the business partnership itself to pay the taxes, but be sure to set aside money that you may owe to the government if the business partnership makes a profit.
- Not getting legal advice. There are many complex legal issues that arise when you start a business partnership. To get help negotiating the documents that you create and sign, and to ensure you have protected your interests, it is advisable that you get legal advice. In fact, each partner should ideally have his or her own attorney representing his interests during negotiations, the drafting of an agreement, and when the business partnership is formally created.
Forming a business partnership is a major decision that can have a profound impact on your future success. An experienced business law specialist at Owen Hodge Lawyers can provide you with guidance and legal advice as you start your partnership. With help from an experienced business law expert, you can get off on the right foot and take smart legal steps to protect your interest and your company’s future. Contact us today at 1800 770 780 or contact us via [email protected] to schedule a consultation with our experienced business lawyers.