Partnership Agreement
Five reasons to set up an Australian Partnership Agreement?
The partnership agreement is a contract between the partners. It agrees the terms of the business. A Partnership Agreement deals with:
- financial reporting
- responsibilities of the partners
- each partner’s financial contribution – capital contributions
- a procedure for resolving disputes
- a procedure for ending or resigning from the partnership
- a partner’s share of the business’s tax losses are offset against other personal income. This is called the ‘flow through’ effect. In contrast, losses in companies and trusts are ‘trapped’.
Is it dangerous to not have a partnership agreement?
We all love the simplicity of a partnership. Indeed, many people are in a ‘partnerships’ without their knowledge. But such undocumented partnerships are dangerous.
You have a friend. Together, you have a vision. You work together in your new business to make a profit. Congratulations, you are in a partnership.
Now that you are in a partnership, you need to document it. Build a Partnership Deed on our law firm’s website. Just press the Start Building above. There are hints that explain every question. And you can telephone us anytime to help you answer the questions.
If you do not document your partnership, you suffer risks and potential losses. You also suffer the risk of joint and several liability of you and your partners.
If you do not have a written partnership then what are the rules
In Australia, each state enacted legislation for partnerships.
If you have no written partnership agreement then you have to rely on out of date legislation in each state:
ACT – Partnership Act 1963
NSW – Partnership Act 1892
NT – Partnership Act 1997
QLD – Partnership Act 1891
SA – Partnership Act 1891
TAS – Partnership Act 1891
VIC – Partnership Act 1958
WA – Partnership Act 1895
Partnerships suffer joint liability
One of your business partners buys a Ferrari in the partnership name. He drives into the sunset never to be seen again. You are liable for 100% of that Ferrari’s payment.
Liability under a partnership is unlimited.
A partnership agreement reduces that risk.
Our law firm’s partnership agreement reduces the joint liability between you and your other partners:
- corporate governance is encouraged by a partnership agreement
- tighter rules between parties as to loans
- better documented fiscal restraint
- warranties and indemnities to protect individual parties
Because you built a Partnership Agreement with our firm, you can seek out your rogue business partner who bought a Ferrari under the partnership and sue him.
Is a Partnership a legal ‘entity’?
Neither a partnership nor a trust is a legal ‘entity’. In contrast, a human and a company is a legal entity. Nevertheless, tax records are usually prepared for a partnership (or a trust). But generally, only the partners (or beneficiaries) pay tax on the revenue.
Are Partners employees?
Partners are not employees. Superannuation contributions and workers’ compensation insurance are not compulsory for partners.
But a Partnership can enter into a separate Employment Contract or Independant Contractors Agreement with a partner.
Advantages of a Partnership Deed
- Simplicity
- Less cost to set up than a company or a trust (where partners are all individuals)
- Inexpensive to run
- Easy to understand
- Losses flow straight to the partner (losses are trapped in a family trust, unit trust and company)
Disadvantages of a Partnership Deed
- The partners are jointly and severally liable. That is, each partner is liable not only for their share of the partnership debts. But also those of the other partners. At worst, one partner is liable for the entire partnership’s debts. It is unlimited liability. Even if a person only had a 10% partner’s share, he or she is responsible for all 100% of the damage arising from the negligence if the other partners do not have the means to pay.
- Unless you are a Partnership of Family Trusts there is no asset protection for each partner.
- Changing of ownership is difficult . It usually requires a new partnership to be established.
Why document the Partnership agreement?
A partnership agreement is a document signed by two or more parties. Unlike companies, partnerships are not taxed. You and your business partner pay tax separately on the profits made through the partnership
Partnerships are a common structure for business owners to manage businesses.
The main advantages partnerships offer over other business structures are:
- Easy and inexpensive to set up
- Any losses are distributed to the partners (while losses remain stuck in companies and trusts)
- Low regulation and privacy – while the Australian Securities Investments Commission (ASIC) oversee and overregulate companies, they do not oversee partnerships
- Less paperwork and no reporting obligations to ASIC
- Flexible income splitting is a tax advantage
Can a partnership employ a partner?
Employ yourself: Individuals as partners cannot ’employ’ themselves. There is no salary packaging, workers compensation or employer-sponsored superannuation. Instead, build an:
if a partner wants to provide services to the partnership.
A Partnership Agreement should not try and document services or products supplied by a partner, or a person or business related to the partner.
Partnership vs Joint Venture
- A Partnership shares profit or losses between themselves. E.g. we made $500k in profit. Now we share that according to our Partnership Interest.
- A Joint Venture shares output. E.g. we got oil and gas from the mining site. As agreed, you get the oil. And I get the gas. We take the output.
Like a partnership a joint venture is a relationship between two or more parties.
Joint venturers work together. So do partners in a partnership.
But unlike a partnership each party retains its separate identity.
A joint venture is often put together for a specific one-off purpose.
And, therefore, unlike a partnership, joint ventures often have a short life. There are often short-term or one-off projects.
In a partnership you carry on an ongoing business. A joint venture is more likely to be a single or isolated transaction.
In a partnership you are jointly liable. But in a joint venture, liability is usually ‘several rather than joint.
Similarly, one party does not have the capacity to bind another joint venturer.
Tax returns for a Partnership vs a Joint Venture
A partnership doesn’t pay tax on its income. Instead, each partner pays tax on its share of the partnership’s net income. But still, in a partnership you prepare a partnership tax return. And the partnership tax return is lodged with the Australian Taxation Office each year
In contrast, there is no requirement to prepare income tax returns for the joint venture.
Partnership of family trusts
A partnership owns an asset or business. The partners share the ‘profit’. All sounds good, but there is ‘joint and several liability’. If one partner makes a mistake, all other partners are liable 100% each for that mistake. The Legal Consolidated Partnership Deed seeks to reduce that risk
Another way to reduce the effects of ‘joint and several liability’ is having a partnership of family trusts. (A ‘family trust’ and a ‘discretionary trust’ is the same thing.) Instead of having a group of individuals or companies as partners, each partner is a Trustee of a Family Trust. Each partner to the partnership is a family trust.
If the Partner holds the Partnership Interest for another person or in trust, then:
1. Press ‘yes’.
2. Type in the name of the trust. And also type in the ABN if the trust has one.
A partnership of discretionary trusts is simply a partnership where each partner is a discretionary trust
Actually, each partner is a trustee of a discretionary trust. Contrast this with a partnership of individuals. Rather than each individual being a partner in the partnership, each individual’s discretionary trust is the partner.
A partnership of discretionary trusts may also have other entities (such as humans and companies) as partners. With Legal Consolidated’s Partnership Deed you do not need to amend the partnership agreement.
Asset protection in a Partnership of Family Trusts
Sure, each family trust, as a partner, is still ‘jointly and severally’ liable for partnership debts. But the only asset the family trust owns is the partnership asset. So if the partnership goes down you do not lose any of your other assets. Your non-partnership assets and personal assets are protected.
Share the Partnership profit with family: If you personally own the interest in the partnership then all income you get you pay tax on. You cannot share that tax burden with your spouse or family who may be on lower rates of tax. But the family trust can distribute the partnership profit as it sees fit. It can, this financial year, distirbute to your son who is on maternity and is on a low rate of tax. Next year the family trust can distribute the partnership profit to just your spouse. The trustee of each trust distributes the trust’s share of the partnership income among the trust’s beneficiaries as it wishes.
Disadvantages of a partnership of discretionary trusts
- More complex than a partnership, company or family trust. (Like LEGO® pieces you bolt these entities on top of each other to get your partnership of family trusts).
- More expensive to set up.
- While financial planners and accountants understand the structure, less qualified people, such as bankers, may not understand how they operate.
How to set up a partnership of family trusts
- Build a company (to be trustee of a family trust)
- Build a family trust (make the company the corporate trustee)
- Repeat for each partner
- Build the Partnership Deed by pressing the blue Start Building button above. Each partner is the trustee of the family trust
Example of a partnership of discretionary trusts
John, Fred and Muriel want a partnership of family trusts. John incorporates a company called “John Australia Nominees Pty Ltd”. Once he gets the Certificate of Incorporation of the company then he builds a family trust. He calls the family trust ‘Avis Family Trust’ after his dead grandfather’s name. (John can call his family trust anything he likes.) Fred and Muriel do the same.
Now with the three companies, they then build a Partnership Deed. The three partners are the three companies. “John Australia Nominees Pty Ltd” and Fred and Muriel’s companies.
Unit Trust vs partnership of family trusts
Commonly your accountant recommends a Unit Trust or a partnership of family trusts for a business with more than one family. (Obviously, if it is just mum and dad running the business then you only need a corporate trustee of a family trust.)
Income. It is often easier to distribute tax-free through a partnership of discretionary trusts. This is when compared to a unit trust or a company.
Tax relief on sale. It is also easier for the partners of a partnership of trusts to access concessional capital gains tax (CGT) treatments. This includes the small business CGT concessions. This is when compared to a unit trust structure. (It is difficult if not impossible to get CGT relief in a company.)
Independence. Each partner’s trust is effectively independent of the others (it is even possible to have partners that are not discretionary trusts, but which are unit trusts, or even companies or individuals, although some of the benefits of operating through this type of structure may then be lost).
Tax File Number, GST, ABN and bank accounts for an Australian Partnership
A Partnership Agreement is a contract. It governs a business relationship between two or more individuals (or corporations) that are working together.
A partnership is not a separate legal entity. It is not like a company. But it still has a tax file number (TFN). A Partnership, while not usually paying tax itself, still lodges a yearly tax return. Instead, each partner is taxed separately on their share of the profits.
A partnership is entitled to an Australian business number (ABN) if it is carrying on an enterprise in Australia. For example: running a business for profit that comes within the definition of enterprise in the GST Act.
Your partnership (just like a trust) is not a separate identity for tax. However, you may still need to register for TFN, GST, ABN, PAYG. You can do this for free on the ATO website.
After a Partnership deed is signed, a partnership bank account is opened.
Does the Partnership Agreement mention AASB15 “Revenue from Contracts with Customers”?
As of 1 July 2021, non-listed companies are no longer allowed to prepare Special Purpose Financial Statements (SPFs). Instead they prepare the arduous General Purpose Financial Statements (GPFS). Small proprietary companies where 5% of their shareholders request GPFS to be prepared are included in the definition of companies that comply with this requirement.
This requirement also applies to SMSF, Trusts and Partnerships, but only where the founding Deed makes mention of AASB15 in its definition of income.
Happily, Legal Consolidated documents do not mention AASB15 in the definition of income.
Further, no Legal Consolidated documents require compliance with the arduous AASB15.
Please telephone us for more legal advice on building your Australian Partnership Agreement.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]