Partnership Agreement
How to set up an Australian Partnership Agreement?
The partnership agreement is a contract. It sets out the agreed terms of the business venture. It deals with capital contributions, financial reporting, and the responsibilities of the partners.
The danger in not having a partnership agreement
We all love the simplicity of a partnership. Indeed most of our clients are in ‘partnerships’ without their knowledge. But 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.
Joint and several 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. 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 business name and sue him.
Is a Partnership an ‘entity’?
Neither a partnership nor a trust is an ‘entity’. In contrast, a human and a company is an 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.
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 (i.e., 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)
- No asset protection
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 will 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 (whereas 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 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.
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 companines, 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.
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
Mobile: 0477 796 959
National: 1800 141 612
Email: [email protected]