Overview

We all have heard about world’s renowned companies like Warner Bros. Studios, Hewlett-Packard, McDonald’s, Microsoft, Apple and Google and also about their success in recent times, but, these companies all have something in common. These famous companies all started off their business in the form of partnerships.

If you are considering starting a business as a partnership, there are number of things you must ensure so that the business can be considered as a legal partnership.

This article will provide you an insight on what a business partnership is, the types of partnership, considerations to make when entering into a partnership and how we can help you in the process.

Partnership Law

The relationship which exists between persons carrying on a business in common with a view to earn profit is known as a partnership. It involves an agreement between two or more persons to enter into a legally binding relationship and is essentially contractual in nature.

All States and Territories have a statute with similar provisions which are applicable within their respective jurisdictions.

According to the Partnership Act 1892 (NSW) (“the Act”), there are three types of partnerships, which are as follows:

a partnership (normal partnership);
a limited partnership; and
an incorporated limited partnership.

There are certain differences between these types of partnerships in terms of their requirements and features. The differences are in the mode of registration, complexity, source of funds and liability of the partners for the debts of the partnership and taxation treatment.

Normal Partnerships

Normal partnerships or just simple partnerships do not need to be registered under the Act.

Normal partnerships may be a suitable structure where more than one person wants to carry on a business together and use a structure which is usually simpler than a company structure.

For example, you may form a normal partnership with your spouse, wherein you do the front end work and your spouse looks after the paperwork and administration of the business.

Limited Partnerships

Limited partnerships are more flexible than normal partnerships. It has two types of partners:

general partners; and
limited partners.

General partners are responsible for the day to day management of the partnership business and their liability for its debt is unlimited. There must be at least one and up to 20 general partners in a limited partnership.

Limited partners play no role in managing the limited partnership and their liability for its debts is limited to the amount of money contributed to that partnership, as recorded in the Register maintained by NSW Fair Trading. The upper number of limited partners for a limited partnership is not restricted, but there must be at least one such partner per partnership.

Incorporated Limited Partnerships

The Act also provides for a special type of partnership, the Incorporated Limited Partnership (“ILP”), to be registered for four types of limited partnerships, which are:

Venture Capital Limited Partnerships (“VCLP”);
Early Stage Venture Capital Limited Partnerships (“ESVCLP”);
Australian Venture Capital Fund of Funds (“AVCFOF”); and
Venture Capital Management Partnerships (“VCMP”).

Considerations To Make When Entering A Partnership

Following are 5 essential considerations to be made before entering into a business partnership:

Decision making

At first you must consider why you need a business partner and whether you are ready for a partnership.

You should decide to form a partnership with someone not because you feel sorry for them or you feel pressurised going into a business with them. Instead you should form a partnership with someone with whom you feel would be able to help your business grow.

The right choice

Not everyone is suitable to be a business partner.

When considering a potential business partner, consider whether the person has expertise in a specific field that you need or your business can benefit from.

If money is your only reason for bringing in a business partner then perhaps you should look for another avenue as you might regret giving over a piece of your business and decision-making power.

Do not panic

Do not panic and never rush into a business relationship with a partner as you might land up making a wrong decision because you did not check your options or explore other avenues.

Take your time and choose wisely as this is one of the biggest decisions of your life.

Equality

Do not just split the profit in 50:50 ratio. You must split everything equally and if it is not then you might land up doing all the work by yourself for nothing.

Split the investment, workload and profits equally and if your partner is not taking the responsibility, then perhaps he/she is not the right person for your business.

Legality & paperwork

Once you are ready to make a commitment, be sure to put everything in writing.

Seek legal advice and make sure that the partnership is completely legal and everyone involved is secured.

How Can We Help You?

As business owners, it is of paramount importance to understand the legal effect of your business structure.

If you do not have proper knowledge about your business structure or the structure you are about to get into, you may inadvertently transfer ownership or control of the business to the wrong hands.

If you are considering entering a business partnership, you must seek proper guidance in order to avoid any possible disputes in the future.

We at Owen Hodge Lawyers have the expertise to advise you on the kind of partnership which will be suitable for your business and the considerations you should make and things to keep in mind before entering into it.

We will be able to help you and your partner in the following ways including but not limited to:

to form the business partnership successfully;
make sure the roles of the partners are clearly defined;
how the business will be run/owned; and
the consequences if the business collapses.

Creating a strong legal foundation will create a safe partnership.

In case you are already in a business partnership, we can also assist you in resolving disputes relating to profit/loss sharing, ownership of assets, management issues, breaches of the agreement, partner responsibilities and business entry/exit issues.

Feel free to contact Owen Hodge Lawyers on 1800 770 780 to provide you assistance in this matter.

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