What To Consider When Starting a Partnership and more importantly Do I need a Partnership Agreement?
Partnerships tend to be an attractive legal structure because to create one, all you need to do is register a business name, open a bank account and start your business off. It is done at that point.
The ease of getting into a partnership often means that people who are fired up with enthusiasm to go into business use that structure because they just want to get going.
The best advice early on is to slow down and think things through carefully.
Provided you are good at what you do, considering the following five points in detail will at least put you in the right ball park to run a successful business:
- Who is your partner?
A Partnership is a legal relationship which allows one partner to enter into a Contract on behalf of the partnership and bind the other partner even though the other partner does not know about it. One partner is liable for debts which are incurred by the other partner. It has been said that you need to be able to trust your partner with your wife, your children and your money. That is true. You are putting your financial future into the hands of your partner. Do you know them well enough to do that?
Partnerships are quick and easy to set up. However, as indicated above, partners who incur debts on behalf of the partnership incur them for themselves, and for their partner, in their own name. The same goes for any liability for the partnership for poor work, property damage or personal injury. Partnership is a high risk business structure because it directly exposes the personal assets of the partners to creditors and if there are no such assets, it exposes the partners to the risk of bankruptcy. It might be better to use a different structure.
Partnership may or may not have tax advantages. It will depend upon your personal situation and that of your partner or partners. All of the personal situations may be different so it is important to make sure that the partnership business structure does in fact suit everyone for tax purposes. Once the partnership has been set up, it can be expensive to change the business structure to something else if it turns out that the partnership structure was the wrong one to choose.
This arises out of our experience in partnership litigation. It is not uncommon for one partner to arrange for the accounts and for the accountant who represents one accountant in their personal affairs also is appointed as the accountant for the partnership. That necessarily creates a conflict of interest if there is any dispute. Further, in disputed partnership matters, it is not uncommon to find that in addition to the partnership accountant being the accountant for only one of the partners in a personal capacity, that some partners’ spouse to be the person who does the partnership books, often from home so that the other partner has no access to the books and records. In short, books and records need to be kept at the office of the partnership and an independent accountant should always be used.
You do not need a Partnership Agreement in order to have a valid partnership. However, for the protection of both partners, you should have a Partnership Agreement. A Partnership Agreement can be used to ameliorate some of the risks of being in partnership by:
- Regulating partners’ entitlement to draw upon partnership funds;
- Regulating partners’ entitlement to commit the partnership to contacts of certain sizes;
- Make provision for how certain items will be treated in the accounts of the partnership;
- Address how loans buy partners to the partnership or buy the partnership to partners will be dealt with; and
- A number of other matters.
A Partnership Agreement will, if properly prepared, allow all partners to know precisely where they stand at all times which goes a long way toward heading off any disputes.
Contact us now to discuss your Partnership Agreement.
Call 08 9445 9200