- Why set up a Business Partnership
- Important considerations
- Business name
- General or limited partnership
- Financial registrations
- How to set up a Business Partnership
- Common mistakes to avoid
- Set up costs
- Case studies
A Business Partnership Agreement is a document which formalises the rights and obligations of two or more individuals starting a Business Partnership together.
Among other things, the document outlines key details of the business, including:
- The nature of the business
- The capital invested by each partner
- The rights and responsibilities of each partner
- What happens in the event of the partnership breaking down
This guide will give you an overview of some of the key benefits of entering into a formal Business Partnership, the steps involved in setting one up, and important considerations you need to make along the way.
It is very likely that you will need the help of a legal professional to write the Business Partnership Agreement. You may also need the services of other professionals to set up the daily operations of your business. You need to be aware of and plan for the cost of these services and any other set up expenses when starting your business.
With the right planning and preparation, setting up a Business Partnership is relatively simple.
Why set up a Business Partnership?
A Business Partnership is one of several business structures which you can choose from. Each structure has different features and benefits, so the one that is most appropriate for you will depend on your situation and the type of business you are starting. Some common Business structures include:
- Sole Trader
- Business Partnership
- Joint venture
Business Partnerships are a business structure which allows for two or more people to go into business together for a common purpose and share responsibilities and liabilities. This makes it different to a Sole Trader which is simpler as only one person has the decision making power and a Company which has directors who run the company and members or shareholders who partly own it.
The advantage of setting up your business as a Partnership is that it allows you to collaborate with your partner or partners to achieve the goals of your business. Having a small team of decision makers can allow your business to react quickly without having to rely entirely on your own ideas.
There are a number of important details that you need to be aware of when setting up a Business Partnership. These details will be a part of the everyday running of your business and must be done correctly.
Important considerations include:
- In some cases, you will need to choose a business name and ensure it is not already registered by another business. You do not need to register a business name if you are trading under your personal names, if you already have a business name, or if one or more of the partners is a business with an existing company name.
General or limited partnership
- A limited partnership is a Consumer Affairs category which involves one or more of the partners being limited in their liability for the debts and obligations for the business. Typically, partners in a business partnership are all equally responsible for management of the business and unlimited in their liability for debts and obligations.
- The Business Partnership will need to apply for an Australian Business Number (ABN) and a business Tax File Number (TFN). You will also need to register for Goods and Services Tax (GST) if you are going to turn over more than $75,000 per annum.
- The partnership will be responsible for paying superannuation to the partners as well as any eligible employees.
- You will also need Pay As You Go (PAYG) tax withholding if the partnership is going to have employees and Fringe Benefits Tax (FBT) if you are going to offer benefits to your employees.
You may need to get professional advice to ensure that these details are set up correctly.
How to set up a business partnership
Setting up a business partnership is relatively simple. However, you will require the help of a lawyer to draft the Partnership Agreement. The steps for setting up a Partnership are:
- Determine the number of partners and the responsibilities and roles of each.
- Have a lawyer draw up the partnership agreement. Your lawyer will customise the agreement to match the needs of your partnership.
- If you have a new business name, you must register it with the Australian Securities and Investments Commission (ASIC). In some cases you do not need to register a business name with ASIC.
- If you are entering into a limited partnership, you need to register it with Consumer Affairs Victoria.
- Apply for the licenses and registrations you need, including ABN, TFN, and GST.
You will need to agree with the other partners on several issues before entering into the partnership. You will need to determine how much capital each partner will invest, if any partners will have limited liability in proportion with their investment, and the level of authority each partner has to make binding decisions for the partnership.
The Partnership Agreement should formalise the role of each partner, their level of authority and the distribution of profits and assets. You will need a lawyer to write the Partnership Agreement to ensure that these details are correctly outlined.
Your Partnership Agreement also needs to outline what will happen if the partnership breaks down. Nobody enters a partnership expecting it to break down, but you still need to plan for a negative outcome.
The Agreement will determine how assets, money, and debts are divided, what will happen to the stocks, clients, and property, and whether or not one partner can continue using the business name, website and other intellectual property.
Common mistakes to avoid
The two biggest mistakes that people make with their Business Partnership Agreements are:
- Not having a written Agreement – While it is not required that you have a written Partnership Agreement, it will be essential for the smooth running of your business. Verbal agreements will not be adequate in complex business situations.
- Having a written Agreement which is incomplete – You need to make sure your Business Agreement covers everything it needs to cover. You need to formalise the negative scenarios as well as positive, such as how to resolve disputes and what will happen in the event of a breakdown of the partnership.
The best way to avoid these mistakes is to have a lawyer write the Business Partnership Agreement for you. That way, you know all your bases will be covered.
Set up costs
Every business is different, and Business Partnership Agreements can vary dramatically in terms of complexity. Hence, the costs involved in setting up a Business Partnership can also vary a lot.
Many of the steps involved in setting up a business partnership will come with a cost, either due to a professional service or a registration fee. These include:
- Legal fees
- Business name and company registration
- Website creation
- Intellectual property such as logos
- GST registration
- Accountant fees
- Liquor, gambling, and tobacco licencing and health inspection if applicable
Along with professional services and registration fees, you also need to take into account the costs required to actually open the doors of your business. These will depend heavily on the type and size of your business and can include:
- Commercial lease
- Employee wages
- Chattels such as desks or vehicles
- Renovation or fitout
Depending on the scale of your business, setting up a business partnership can be very expensive or relatively cheap. It may be a good idea to get expert financial advice to ensure you have enough capital and that your business will be financially viable.
Mike and Dave
Two friends, Mike and Dave, decided to set up a Business Partnership to open a microbrewery and pub. They formalised their relationship with written Partnership Agreement which stated that the two were equal partners and would make business decisions jointly.
Mike and Dave each had different responsibilities within the business. Mike ran the brewery while Dave managed the food and beverage service in the front of house. The business was successful, but after two years, communication was beginning to break down between Mike and Dave.
Mike had been deciding on beer recipes without consulting Dave, who wanted to pass on requests from the customers. Dave also decided to stock beer from another brewery with whom Mike had a rivalry. Their relationship got so bad that the two were ready to sell the business and part ways.
Their Business Partnership Agreement stated that they must attend mediation to resolves any disputes before either partner left the business. With mediation, they were able to resolve their communication issues and get the business back on the right track.
Jennifer and Mitchel
Siblings, Jennifer and Mitchel, wanted to start an online business together making and selling jewellery. They thought that since they were family members, that they wouldn’t need a written Partnership Agreement. They simply had a verbal agreement to split profits and debts 50/50.
Their business was successful, and they both began working on it full-time after the first year of working on it as a side project. However, they started to disagree about the direction of the business. Jennifer thought there was a bigger market for a more traditional style of jewellery while Mitchel thought that their quirky and unique style was what set them apart from their competitors.
They weren’t able to come to an agreement on the direction to take the business in, and it got to the point that they no longer wanted to work together. However, they also couldn’t agree on who would get to keep their website, brand and customer information.
After a lot of arguing, they agreed to have an independent third party value their business and Jennifer bought out Mitchel’s half. Because they didn’t have a formalised dispute resolution policy, their arguments were very personal, and their relationship was badly damaged for several years afterwards.
Setting up a Business Partnership can be a very effective way of running a business. However, it is essential that your partnership is formalised with a written Business Partnership Agreement.
Having a Partnership Agreement written by a lawyer will give your business a better chance of success as everyone involved will know exactly what their rights and responsibilities are. Formalised dispute resolution policies will also be invaluable in the event of a disagreement within the Partnership.
Your Lawyer will be able to guide you through the process of setting up your Business Partnership, from writing the Partnership Agreement to advising you on any other steps you need to take.
For more information or for help with your Business Partnership Agreement, call Rose Lawyer & Conveyancers on 03 9878 5222.