• Usually, the maximum number of partners is limited to 20.
• For some professional partnerships such as accountants the number of partners can be up to 1,000.
• Others such as actuaries, medical practitioners, share brokers and scientific research partnerships can have up to 50 partners.
• For your limit in your specific industry you should refer to the Corporations Act 2001 or book an appointment to speak with us. 

• Partnership agreements constitute evidence that the parties intend to operate as a partnership and detail how assets are owned, in what proportion each partner has contributed assets or finances, rules around joint liability, agreement over control of the partnership, how profit is to be distributed and how conflict should be resolved.
• Without a partnership agreement, you open yourself up to disputes among partners in the event things go wrong, as well as increase your financial risk.
• A partnership agreement is not required by law when you establish a partnership.
• The Australian Taxation Office (ATO) may also want to review a partnership agreement’s terms.

• The cost of a partnership depends on the scale and complexity of your business. 
• For a small family partnership, for example a husband and wife, it may be quite simple to arrange and relatively low cost. 
• If you are looking to establish a professional partnership there will be increased costs associated with drafting a partnership agreement that suits all partners, as well as ensuring that any professional fees and licenses are obtained, and compliance with any industry specific regulation of partnerships is achieved.

• No. Partnerships are not separate legal entities and therefore cannot hold property or other assets in their own right. 
• In the event that the partnership cannot repay its debts your personal assets may also become vulnerable to claims by creditors.
• This is different to a trust, where property is transferred to a trustee, who holds the property 'on trust' for the benefit of one or more beneficiaries. 
• Since the beneficiary does not technically own the legal title to property, it is better protected in the event that a beneficiary is made insolvent or bankrupt. 

• A partnership can be dissolved by: 

1. a partner making a statement that the partnership is dissolved effective from a date;
2. it has become illegal;
3. a partner dies or becomes bankrupt;
4. a court order has been given to end the partnership; or
5. the lifetime of the partnership has expired.

• Unlike when operating as a sole trader, when operating a partnership you will not have complete independent control over the business. 
• Once you establish a partnership you will generally have control over the management of the business as one of many partners. 
• Partnership law gives each partner equal rights over the management and decision making unless this is varied by the partnership agreement. 
• Decisions will often need to be made unanimously or as a majority. 
• Conflict and friction can arise in partnerships where not every partner is united towards a common goal. 
• Partners are also obliged to act in the best interests of the partnership. 

• Rules for partnerships are generally less onerous than those for companies. 
• Partnerships are usually more informal arrangements than companies. 
• You are not required to maintain minutes, hold general meetings, elect any officers, engage in share dealings, or file annual financial reports. 
• Most of the rules governing partnerships will be found in the Partnership Act 1892 (NSW) and in the partnership agreement which you draft when establishing your business.

• A partnership structure is not easy to change after you have operated as a partnership originally.
• Often there are several different parties involved with one or more resistant towards a change to another structure that may provide them with less control. 
• It is also more difficult to transfer a share in a partnership than it is to transfer shares in a company. 
• Any change to business structure after a business has been in operation for some time will usually be quite complex and costly to achieve.
• It is always best to develop a long term business plan for the future of your business and choose the best structure from the start. 

• While a partnership agreement can be drafted in a way that allows income to be split between different partners on an annual basis, a discretionary trust will generally offer more flexibility. 
• In a partnership, partners generally hold their interest in the assets and income of the business in set proportions.
• In a discretionary trust, the trustee has absolute discretion as to who she distributes income to, in what amounts (if at all) and when.
• A trust will generally provide greater flexibility and opportunities for tax minimisation than a partnership arrangement. This is particularly the case in family business scenarios.

• A partner can usually leave the partnership at any time, subject to any terms in the partnership agreement that provide otherwise.
• A partner may be ‘expelled’ from a partnership by dissolving the partnership and forming a new partnership without that partner.
• There are also instances where a partner will be required to leave, or their share required to be sold such as in the case of death, and sometimes because of a divorce or bankruptcy.
• Provisions of a well drafted partnership agreement will govern the rules around buying and selling a partnership interest.

Question

My investment partner and I intend to start a business through a partnership structure and hold a 50/50 share each. She also has a number of different businesses outside our partnership. I'm not sure what financial position she is in. What are the risks if any of her other businesses go bankrupt? What would happen to me?

Answer

• If your business partner cannot satisfy her debts in one or more of her other businesses, a creditor, bankruptcy trustee or liquidator may require her to sell her share of the partnership and any partnership assets to pay her other business debts.
• Alternatively, regardless of any creditor situation, if your other partner becomes bankrupt and you don't have sufficient individual funds to meet the ongoing costs of the business, you may be forced to close and dissolve the partnership. 
• If the cash flow problems lead to the partnership accumulating debt which cannot be paid out of the partnership assets, your personal assets may also be at risk.
• Before you enter into a partnership you should make reasonable checks of the financial position of any other partners. 

Question

I'm a plumber, and I'm thinking of starting a partnership with my brother in law who is a builder. How do we pay ourselves? Are we employees of the partnership? 

Answer

• Broadly speaking no, you are not employees of the partnership because the partnership is not its own legal entity.
• Partners usually receive partnership income in proportion to their contribution to the partnership in capital or labour. Remuneration reflects the partnership structure more so than a traditional 'salary'.
• Partners can however receive fixed 'drawings' throughout the year before the remainder of the income is split. Although these are often treated as 'wages' by the partners receiving them, they are not classified as wages for tax purposes. These 'drawings' cannot be claimed as a deduction from the overall partnership income in the same way that a salary would be in the sole trader scenario.

Question

I've run the family farm as a partnership with my three sons for several years but it's time for me to retire. No one else will buy my partnership share. It will go to my sons. What happens to our family partnership if I retire?

Answer

• When a partner decides to retire from the partnership it is treated as if a new partnership has been formed and the old one ends. That is because the persons running the partnership are now different.
• You are entitled to require your sons to pay you for your share of the partnership assets if that is what you want to do or alternatively the assets can be sold and divided among the partners in the shares to which each is entitled.
• Sometimes the Australian Taxation Office (ATO) will require that you register for a new tax file number or ABN. However, as you are just retiring and no new partners are coming on board, that may not be necessary in your case. 
• Licenses and registrations may not need to be altered. It depends on your particular business circumstances. We can assist in advising on this transition and help minimise any potential taxation implications.

Question

I have a full time job employed with a large organisation however I want to start a business with a friend on the side. It's going to take a while for us to start making a profit so we are expecting losses in the first year or so. Is a partnership an effective way of operating a business that will make some initial losses? 

Answer

• One of the advantages of operating as a partnership or a sole trader is that the losses you incur initially can be used to reduce your taxable income earned from other sources such as your day job. That means you may pay lower taxes overall.
• Certain conditions must be met for this to apply. You should seek legal advice on whether you fall into any of the categories allowing you to offset such losses against your personal income.

Question

Our partnership has just been reconstituted because one of the original partners left. What does that mean for the rest of us? Are there any duty consequences? 

Answer

• There can be various income tax and duty issues when a partnership is reconstituted. 
• Firstly, the remaining partners acquire an interest in the departing partner's partnership assets which is treated as a Capital Gains Tax (CGT) event. That is because either the outgoing partner is selling you part of her share or you are all acquiring a new interest in the assets of the departing partner.
• If a new partner takes over the departing partner’s interest then that new partner will obtain a share in each of the partnership assets which can result in a liability to pay transfer duty. The original partners are also treated as having disposed of an interest in each partnership asset with the new partner acquiring it.
• The CGT implications of transitioning partners in and out of a partnership can be a reason to avoid choosing a partnership structure in the first place. Generally, for a business which anticipates a high turnover in terms of management and control, a company is often a more suitable structure.