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There are a wide range of business structures that people/ businesses may consider using for different purposes. These typically include: being a sole trader, partnerships, trusts and companies. Partnerships are one popular structure used.
Where you elect to use a partnership, it is important to consider having a partnership agreement drafted in order to accurately set out the terms of the partnership. This may assist in preventing disputes later arising regarding various aspects of the partnership, such as the rights and obligations of each partner.
This article will consider, what is a partnership, what is a partnership agreement, advantages and disadvantages of a partnership and key takeaways.
A partnership is a business structure by which 2 or more people work in business together and share the businesses income and/ or losses.
Partnerships are distinguishable from other business structures such as companies in that a partnership is not a separate legal entity. As such, partners are jointly and severally liable for any liabilities incurred by the other partners.
If you are in New South Wales, the Partnership Act 1892 (No 12) (NSW) (“the Act”) defines a partnership as:
(1) …the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership.
(2) But the relation between members of any company or association which is—
(a) incorporated under the Corporations Act 2001 of the Commonwealth, or
(b) Formed or incorporated by or in pursuance of any other Act of Parliament or Letters Patent or Royal Charter, is not a Partnership within the meaning of this Act.
Section 2 of the Act also provides provision for a list of rules which are to be considered when trying to ascertain whether a partnership exists (however such rules do not apply to incorporated limited partnerships).
An example of these rules is section 2(2) which provides that “the sharing of gross returns does not in of itself create a partnership whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived”.
You may elect to use a partnership where the number of people in the project/ business is small and limited liability is not needed. However, it is always best to obtain professional advice from your accountant and/ or lawyer regarding which business structure is best suited for you.
Each state and territory has its own legislation that supplements or modifies the Partnership Act. Here is a list of the relevant partnership legislation in each state and territory:
These Acts set out the legal requirements for forming and operating a partnership in each jurisdiction, and partners should refer to the relevant legislation in their state or territory for guidance.
This is why partners should seek advice from a lawyer and have a partnership agreement legally drafted to ensure that it is consistent with the applicable legislation and meets their specific needs and requirements.
A partnership agreement is a contract between two or more parties who wish to enter into a partnership.
Depending on the nature of the partnership, and the business venture being entered into, these agreements can range from simple to complex.
Some important terms that a partnership agreement should generally include:
It is vital to accurately set out what each party is to contribute to the partnership. This can include, money, equipment, time, ideas etc.
It is important for the partnership agreement to set out how profits will be distributed. For example, it is not necessarily the case that in a partnership, each partner will receive a 50% share of the profits, and several factors could contribute to one party receiving more profit.
It is likely that each partner will have his/ her own duties and responsibilities. By clearing setting out the obligations of each partner, you ensure that each partner can refer back to the partnership agreement to ensure that the partner is completing their obligations as prescribed pursuant to the agreement.
A partnership agreement should expressly state the term of the partnership. For example, whether the partnership continues until one party terminates, or, the partnership is to last for X amount of weeks, months or years.
A partnership agreement should also provide provision for what happens when a person elects to enter, or, leave the partnership. This may include notice periods for departure.
This may include administrative matters such as how often partners are to hold meetings, and expectations pertaining to attendance at those meetings.
Having a legally drafted partnership agreement is important for several reasons, including defining the terms of the partnership, avoiding misunderstandings and partnership disputes, protecting partners’ interests, meeting legal requirements, and facilitating changes to the partnership.
Written partnership agreements enhance the likelihood that your business runs smoothly, that partners understand their rights and responsibilities, and that all partners are protected in the event of disputes or other issues. It is important to consult with a qualified lawyer to draft a partnership agreement that meets the specific needs and circumstances of the partnership.
At Progressive Legal, we help ensure our clients are protected from disputes between business partners, providing advice and guidance that allows you to follow all the necessary laws. We’re here to help you understand the relevant legislation, legal requirements and agreements that apply to your business partnership.
Advantages of a partnership include:
Disadvantages of a partnership include:
Partnerships are popular business structures. If you’re considering using a partnership, it is important to have a partnership agreement in place which outlines the various terms which should be addressed. These include but are not limited to: duties and responsibilities of each partner, decision making processes, exit and admission as a partner etc.
By having a partnership agreement in place, you minimise the potential of long-winded disputes transpiring where there are disagreements among the partners as partners.
A partnership agreement is a legal document that sets out the terms and conditions of a partnership. It is a contract between the partners, outlining the rights and obligations of each partner, as well as the rules and procedures that will govern the partnership.
Partnership agreements are not required by law in Australia, but it is strongly recommended that partners have a written agreement in place. A partnership agreement sets out the terms of the partnership, including the responsibilities and obligations of each partner, the share of profits and losses, and the process for resolving disputes.
The partnership agreement is a critical document that helps ensure that all partners are on the same page when it comes to important aspects of the partnership. It provides clarity around each partner’s role and responsibilities, as well as how profits and losses will be shared. By having a clear partnership agreement in place, partners can avoid misunderstandings and disputes down the road.
No, you should not use a partnership agreement template. Partnership agreements should be drafted carefully and with the help of a lawyer to ensure that the terms are clear and enforceable. Additionally, partnership agreements should be regularly reviewed and updated to reflect any changes in the business or partnership structure.
“Ian and his team have been great, […]. I offer innovative products and unusual business partnerships, and Ian’s team have been very accommodating and flexible helping me get everything in place.”
Graham Ewins, Director