A business partnership can be a satisfying, profitable and enduring form of a business relationship. Partnerships offer more freedom for business owners with shared business tasks and the potential to earn greater profits. Many individuals have found that when the right synergy exists between partners, the world is their oyster.
A business partnership is defined as an association of people who carry on business as partners or receive income jointly.
A partnership is not a separate legal entity like a Proprietary Limited (Pty Ltd) Company, and doesn’t pay income tax on the income earned by the partnership. Instead, each partner pays tax on their share of net partnership income.
Under Australian tax law, partnerships need to have a tax file number (TFN) and even though they do not pay tax, they are still required to lodge an annual partnership income tax return.
If the partnership is carrying on an enterprise in Australia, it is also required to have an Australian Business Number (ABN)
There are three types of Business partnerships
1. General Partnership. Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.
2. Limited Partnership. “Limited” means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decisions, which encourages investors for short-term projects, or for investing in capital assets. Forming a limited partnership is more complex and formal than that of a general partnership.
3. Joint Ventures. JV’s are usually undertaken to pursue a single project and are intended to last for a pre defined period. The relationship between the participants in a joint venture is usually governed by a joint venture agreement.
Advantages of Partnerships
There are many advantages to sharing a business with partners, including:
- A partnership can be easy and inexpensive to set up.
- Where the partners are within the same family, certain tax advantages exist for example husband and wife.
- Your share of the partnership losses are deductible from your personal income and, if your income is small, the tax you pay on your share of partnership income will be low.
- The partnership benefits from a broader range of knowledge, experience and skills.
- There is access to more capital because your resources are combined.
- Unlike a sole trader it is easier to take time off.
- Fairly easy to dissolve and recover your share of investment
- One partner can sustain the business during another's illness or absence due to other commitments
- Partners own the profits
- Management tasks can be shared reducing the burden on individual partners
A partnership structure is not without its problems. When relationships are incompatible, problems can surface. These may include:
- disputes over profit sharing, administration and business development
- personality clashes
- each partner is personally responsibility for business debts and liabilities incurred by the other partners
- one partner may dissolve the partnership and effectively ruin the business
- in financial difficulties, the individual partners' assets are at risk to settle partnership debts
- there may be taxation disadvantages
- problems with deciding who has authority
- problems when one person leaves or another wishes to join
Fortunately many of these issues can be addressed in a solid Partnership Agreement.
How to make your Business Partnership a success?
Partnerships are much like a marriage, in that you are responsible for your partner's actions. So before you choose a partner there are a few factors to consider if you expect your partnership to succeed.
Do you have a shared vision? It’s vital that all parties involved agree on the same strategic direction of the business. If one partner wants a global business and the other wants to keep the business small and manageable then it won’t be long before the edges start to fray and tensions build. Set achievable targets and a clear course of action for the business that meets the needs of all parties involved.
Clearly define the roles of each Partner. Successful partnerships always exploit the skills and talents of those involved. If each partner takes on a defined role and there is general agreement on the business plan, goals, and visions from the outset, success will follow.
For example One partner may be an exceptional Marketer with strong human relations and staff management skills while the other excels in finance and accounting.
Recognise the strengths of each partner and define the roles accordingly.
Bypass equal shares. Although It may seem even-handed and logical to divide the share of ownership equally, this shareholder division may hinder the decision making process.
Alternatively consider a 49%-51% split, This helps to overcome situations where the decisions making process has reached a stalemate. Where this is not possible, making a provision for mediation through a mediator, mentor or local business council will ensure your business decisions do not become deadlocked.
Hold Regular Partnership Meetings and Keep Records. Give your fellow partners the opportunity to air their views. Review important matters such as new clients, competition, projected income and expenses, distribution of work among partners and other administrative or office management issues. Regular meetings also provide an opportunity to have any grievances heard.
Remember a solid partnership should be founded on good communication.
A written partnership agreement is strongly recommended.
Putting it in writing legally makes good sense because it prevents a costly oversight, which often occurs in verbal contracts.
Obviously, when two or more people decide to work together, they are generally more concerned with their creative direction, rather than their legal status. However, it is important to consider and resolve the rights, roles and responsibilities of each member of the partnership in writing before a misunderstanding or dispute arises.
Despite the best of intentions, relying completely on our memory is a sure way to forget some obligations or even have doubts as to whether the other parties fulfilled them.
Where no partnership agreement exists the shares of the partnership may be inferred under the Partnerships act, based on a course of dealing and for this reason alone a written agreement is crucial.
A partnership agreement sets out the specific conditions that apply to the partnership. It will spell out the responsibilities of the parties involved and should as a minimum cover the following provisions.
- Description of the Business
- The role and authority of each partner
- Amount of equity invested by each partner
- Entitlement to and share of profits
- Term of the partnership
- The principal place of business
- Banking arrangements
- Accounting and Valuation Principles
- Retirement and Death Arrangements
- Terms for changes or dissolving the partnership.
- Distributing assets on dissolution
Putting into place a shareholder’s agreement can be equally important. This is especially so, if one partner decides to sell out his or her share later, and the terms and conditions for doing so have already been worked out and forms part of a signed partnership agreement.
Partnership agreements may include a buy-and-sell agreement where the surviving partners purchase a deceased partner’s partnership interest. This agreement allows the business to continue and lessens financial problems upon the death of a partner. A buy-and-sell agreement may be funded with the proceeds of a life insurance policy.
Consider a business partnership structure when you have someone to complement your skill set and add value to your company.
Partnerships can work when the right foundation is laid in the beginning and can be more rewarding and profitable way to manage a business.