Tread carefully with a handshake partnership

A partnership is like a marriage. You enter into it full of optimism and confidence that the pooling of your skills, knowledge and experience will make you a formidable team. Till death do you part.

There is a lot to be said for partnerships. They’re relatively easy to set up and inexpensive. There’s relatively less paperwork compared with trusts and companies. There is less government regulation when compared with a company. There’s more privacy compared with kind of intrusion regulators impose on companies. Obviously, there is a broader management base, which means a wider pool of expertise and shared risk, not to mention potentially more sources of capital. Some partnerships can offer tax planning advantages if they include income splitting.

But like many marriages, business partnerships can be fraught with tension, stress and financial problems. And as with some marriages, you may discover that you no longer see eye to eye and that your goals are actually far apart.

This is where the disadvantages come in. There can be a lack of continuity, divided authority and friction between partners with disputes over administration and profit sharing. Transfer of ownership can be difficult. Adding partners is difficult because that generally requires the agreement of all partners. Also, members of the partnership can be individually and collectively liable for the defaults of other partners. If a partner wants to join or leave, all the partnership assets would have to be valued. It goes without saying that if a partner wants to dissolve the business, it will bring the partnership to an end.

Partnerships require some relinquishing of control – if you’re the type who always needs to be in charge, think carefully before proceeding. Identify what you bring to the table and where you need outside help from a partner. Successful partnerships are underpinned by trust, patience and a strict code of ethics. Most partnerships fail because of ineffective communication.

Many partnerships are created by friends and colleagues, using verbal agreements: more or less a handshake. It has to be said that the law assumes everything is shared equally, from profits to losses, which creates issues when the partnership runs into problems.

It is better to formalise the partnership with a written agreement, like a pre-nup before a marriage, covering such issues as the value and division of the assets. A well-written agreement is enforceable under civil law. It should also look at how the profits should be shared after the partnership has been wound up.

The agreement should set out issues like how the business is controlled, how the profits are shared, how the assets (including intellectual property like trade names) are divided. It should also set out who is liable for business debts and what the respective entitlements are. It is important for the partners to agree on such issues as the limits of liability in proportion to their capital investment or the level of authority each partner holds when it comes to making binding agreements on behalf of the partnership.

There also needs to be a “dissolution of partnership agreement” covering issues such as one of the partners being asked to act as administrator of the dissolution, a recording of the assets, arrangements where partners may buy the assets individually and disposal of the remainder of the assets.

While there are plenty of pro-forma partnership agreements floating around, it is best to get it done through a solicitor. A partnership needs a tax file number and an Australian business number.

Leon Gettler is a senior business journalist who writes for a range of leading newspapers and journals

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