Starting a business is an exciting experience, especially when shared with family or friends. However, in this time of excitement, people often overlook the importance of setting up a partnership agreement which clearly sets out the terms of the partnership and each partner’s responsibilities.
As experts in dispute resolution, Slater and Gordon has seen the impact not having a formal agreement can have in the unfortunate event that the partnership turns sour.
What is a partnership?
A partnership is a group of people who carry on a business and share the income and expenses between themselves. It is common for family and friends who start a business together to operate a partnership.
While partnerships are relatively easy and inexpensive to set up, it is important to note that:
- Each partner is personally liable for the debts of the business.
- Partnerships must have an Australian Business Number (ABN).
- The partnership’s income is distributed to partners and taxed at the partner’s individual income tax rate.
- Partnerships must lodge a separate partnership tax return with the Australian Tax Office (ATO) every year.
- The partners are not employees of the partnership so they have no superannuation entitlements from the business.
- It is not easy to change or remove partners in a partnership and it may involve the existing partnership being dissolved and a new partnership created.
What should a partnership agreement include?
A partnership agreement should address the following matters:
- the duties and responsibilities of each partner;
- how the partners are to make business decisions and manage the business;
- how income and losses are to be distributed among the partners (profits and losses may not always be distributed equally amongst partners);
- how the partners will deal with any disputes that arise;
- what happens to the partnership if a partner becomes seriously ill or passes away; and
- how a partner may be removed from the partnership.
Why is a formal partnership agreement a good idea?
Although a written partnership agreement is not essential for a partnership to exist, we strongly recommended a written agreement be prepared to avoid disputes as a result of any uncertainties about the partnership arrangement.
Common partnership disputes
There are many situations in which a partnership dispute can arise, however some of the more common situations we have seen include the following:
It can be very difficult to work out how much of the profits or losses a partner is entitled to, or responsible for, without a formal partnership agreement that sets out each partner’s entitlement to profits as well as their responsibility for any losses.
Relationships between partners often breakdown due to disagreements about how the business should be managed or operated, or what assets or infrastructure should be purchased or sold by the business. Operating a business with family members or friends after the relationship has turned sour is extremely difficult, and in many cases, can lead to the business deteriorating or even failing.
Having a partnership agreement which sets out how decisions are to be made for the business (for example, by a majority vote) and how any disputes amongst partners will be dealt with minimises the likelihood of disputes arising and otherwise allows disputes to be resolved in a timely manner.
It may be necessary to remove a partner if that partner’s conduct is harmful to the business (eg. harassing staff members or making unauthorised comments to the media). Without a partnership agreement that sets out the process for removing a partner, the process can be a difficult and prolonged process, and lead to more damage being caused to the business than necessary.
A conflict of interest may arise if a partner uses their position for personal financial gain or to benefit another company in which they have a financial interest to the partnership’s detriment. For example, a partner in a property development venture may commission a construction company that they own to complete building works, without informing the other partners of their financial interest in the construction company or seeking their permission.
Many businesses rely on proprietary information about technology, formulas and processes to help them gain an edge over their competitors. This proprietary information may be misused if a partner uses it to establish their own competing business or sells it to a third party for a profit.
How we can help
Slater and Gordon can help you by:
Providing you with advice about your rights and obligations in an existing or potential partnership dispute
Assisting you negotiate a resolution regarding an existing partnership dispute.
Representing you in any legal proceedings relating to a partnership dispute.
The contents of this blog post are considered accurate as at the date of publication. However the applicable laws may be subject to change, thereby affecting the accuracy of the article. The information contained in this blog post is of a general nature only and is not specific to anyone’s personal circumstances. Please seek legal advice before acting on any of the information contained in this post.