Business partnerships are common business structures in Australia.
Partnerships are where 2 or more individuals, corporate or other entities, agree to carry on business together with a view to profit.
To be successful, all of the partners in the partnership must have the same goals and objectives. Partnerships can be formed with or without a written partnership agreement. In the absence of a partnership agreement, all partners will be treated equally.
This means they:
• share the profits equally;
• bear the losses equally; and
• are equally responsible for the actions of the partnership.
The partnership itself is not a legal entity. It may operate with a business name, however, it exists through the individuals that collectively make up the partnership.
Each partner can be sued individually for the full amount of any debts that the partnership owes, not just their share of the debt. This is known as been jointly and severally liable.
Should one partner be held responsible for the debts of other partners, they in turn can sue the other partners for recovery of their share of the debt.
Limited liability partnerships (LLPs)
An LLP can be formed to limit the potential liability of some partners. This enables individuals to invest in a business without being potentially liable to lose any more than the extent of their investment. The principal partner in the business will remain liable in the same way in which they would be liable in an ordinary partnership arrangement.
Partnership agreements
A partnership agreement is a written agreement between the partners that records the terms of the partnership. It can address core issues such as how profit, liability and responsibility are to be divided.
Partnership agreements usually record the capital that the partners have invested in the business, prescribe when and how that capital can be withdrawn and how profits within the partnership are to be distributed. For instance, it can require a percentage of the profits to be retained by the partnership and added to the partnership capital. Alternatively, it can provide for the distribution of the profits to be based on either the value of each partner’s capital investment or their contribution to its operation.
A partnership agreement will also address the processes necessary when a partner chooses to leave the business. It can also determine how a partnership share is to be valued in the event of death.
A well-run partnership will always have a partnership agreement to address the above as well as to set out operational issues for the business.
Ashbrooke Law. Innovative. Commercial. Responsive.
Disclaimer
Ashbrooke Law publications are intended to provide guidance and general information. They should not be relied upon as legal advice. Formal legal advice should be sought on matters of interest arising from this article.