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I want to enter a partnership with my family and friends. What do I need to know?

Have you got an exciting new business idea? Have you thought about starting up a business with those you trust the most, your friends and family?

With a shared vision and mission, it can be a great idea to come together with those you know best to help make your business a success. After all, studies have shown that when you are surrounded by the people you like, you are happier working.

There are many ways to set up and structure a new business, such as a company or a trust. This post doesn’t deal with which structure might be the right one for you, but assumes that you’ve decided to go with a partnership. If you’re not sure about which structure you should use, please contact us for a free initial consultation here.

There are always risks to consider when entering into any business relationship with those closest to you, including a partnership agreement. By being caught up in such an exciting time, it can be easy to disregard the importance of clearly outlining the specific roles and responsibilities within the partnership.

At Ilberys, having seen the problems that can arise within these partnerships firsthand, we have put together our top tips for making your partnership one that lasts.

 

What is a partnership business?

A partnership business is a formal arrangement where two people or a group comes together to operate a business and share profits. While many of these businesses share profits evenly, this does not have to be the case and many others share profits differently.  

Being relatively cheap and simple to set up, partnership businesses are a business structure often adopted by friends or family members that want to set up a business together.

Here are some of the most important things you will need to know about partnerships:

  • You will need an Australian Business Number (ABN).
  • Within the partnership, you will each be personally liable for all of the business’ debts, though you are entitled to claim a proportional contribution from the other partners,
  • Acts by one partner in carrying on the partnership bind all the other partners.
  • All income gained within the partnership is given out to the partners and taxed at the individual income tax rate of the relevant partner. Partnership losses are also shared in the same way.
  • Every year, separate partnership tax returns must be lodged to the ATO in addition to personal tax returns.
  • As a partner, you are not classified as an employee so you are generally not entitled to any superannuation benefits from the business.
  • As removing or switching those within partnerships is very difficult, if the partners are to change, you may need to disband the current partnership and create a new one unless clear provision is made in a written partnership agreement.
  • The property of the partnership is owned by the partners in proportion to their interest in the partnership.
  • The partners of a partnership are not limited to natural persons, and can include companies and trusts.

 

How do you set up a partnership business?

While it may appear simple at first to set up a business partnership, it is best to involve a lawyer to help you draft a partnership agreement. While not mandatory, we strongly recommend writing up an agreement to avoid any disputes that may arise down the track due to any confusions about the partnership.

At Ilberys, we can help you write up a partnership agreement that will specifically correspond with your partnership’s needs. This should include:

  • Each partner’s specific roles and responsibilities
  • How the business will be managed by the partners
  • How the partnership will make business decisions
  • How profits and losses will be shared between the partners
  • How the partners will handle any disputes that may arise
  • In the case where a partner is no longer able to be a part of the partnership, how a partner can be dismissed or removed from the partnership, with or without their agreement at the time

How do you register a business partnership?

While general partnerships are not currently required to be officially registered in Western Australia, the business name your partnership uses must be registered with the Australian Securities and Investments Commission (ASIC) under the Business Names Act 2011 (Cth).

 

What could go wrong?

While setting up a business partnership with your family and friends may seem like a foolproof idea, before you enter into this arrangement you should first consider what could go wrong. Just as everyday disputes can naturally arise between your closest family and friends, when a business is involved these disputes can escalate pretty quickly.

Some common partnership disputes include:

Disputes about how profits and losses are distributed

  • Without a formal partnership agreement, it can be challenging to ascertain just how much of a business’ profits and losses a partner is accountable for as between other partners.
  • This is why Ilberys strongly recommend the formation of a written partnership agreement which clearly outlines these terms.

When the relationship between the partners experiences turmoil

  • Sadly, no matter how close you may be with your partner before the business is formed, often these relationships can go south quite quickly in a partnership.
  • This relationship breakdown may be due to disagreements about the management, day-to-day activities of the business or often even personal matters that do not relate to the operations of the business.
  • Ilberys strongly recommend including how disputes will be handed in the partnership agreement to ensure any feuds are dealt with quickly and fairly, as well as minimising the risk of such feuds occurring.

Someone in the business thinks a partner should be removed

  • Sometimes the situation arises where a business believes one of the partners is behaving in a way that could be deemed detrimental to the business.
  • This can happen in the form of acting unprofessionally at work or sharing trade secrets to those outside the business.
  • Again, Ilberys strongly recommend including how a partner can be removed from the partnership in the written agreement to avoid any further harm being caused to the business.

It is believed that one of the partners has a conflict of interest within the business

  • It is not uncommon for a partner to use their role in the business purely for their own personal gain.
  • This can also happen where a partner uses their role to be advantageous to a rival company.
  • In this case, the written agreement should outline how to handle such disputes or how to remove a partner should the situation escalate.

 

What makes a good business partnership?

The reality is, a business partnership is only as good as the effort that goes into planning it. Compiling a written partnership agreement with the help of a lawyer to ensure all roles and responsibilities are clearly set out and agreed by all parties is the best way to ensure that the business partnership is set up to be fair, reasonable and strong.

At the end of the day, the key is to support each other within the partnership and understand that it is natural for disagreements and frustrations to arise. By clearly outlining both your personal and business’ goals early on, you will ensure each partner’s expectations are understood and managed.

 

Not sure what to do next? At Ilberys, we can assist you.

If you are struggling with a partnership dispute, we can assist you with understanding your rights and obligations within a partnership and can provide you with advice on what to do next. With extensive experience in disputes between business partners, we can take on any dispute cases to help you achieve a resolution quickly.

If you have any questions about a potential partnership or if you would like help compiling a written partnership agreement, Ilberys can help you. As the no-shortcut lawyers, we pride ourselves in our ability to provide solutions for businesses with integrity and professionalism.

Want to find out why Ilberys has been a preferred firm in WA since 1955? Reach out for a free initial consultation here.