Structure a Business Partnership Without Risking Your Friendship
Entrepreneurship with a friend may be a great idea, pairing common passion with complementary expertise. But without due planning and structuring in the law, a business partnership turns into a bone of contention immediately, hurting not only the venture but also your friendship. Here is a step-by-step guide to structuring a business partnership in Australia such that your relationship remains unaffected.
Understanding Business Partnerships in Australia
A partnership is a legal form of business where two or more people share ownership, management, profits, and liabilities. In contrast to a sole trader, where one individual is personally liable, a partnership entails joint obligations, which can cause conflict if not well managed.There are three primary forms of partnerships in Australia:
General Partnership (GP) – Partners have equal liability for debts and obligations.
Limited Partnership (LP) – General partners (with unlimited liability) and limited partners (whose liability is capped at their investment).
Incorporated Limited Partnership (ILP) – More formal partnership with further legal formalities and protection against liability.
Being aware of these structures is crucial for deciding on the correct setup for your business.
Important Considerations Before Establishing a Partnership
Define Roles and ResponsibilitiesClearly define the role of each partner in the business. Ask yourself:
Who makes decisions?
How will everyday operations be handled?
What happens if a partner wants out?
Having a clear structure saves time and avoids confusion.
Write a Solid Partnership AgreementA partnership agreement is a binding contract that states major terms and conditions, such as:
Ownership percentage – Describe each partner's equity interest.
Profit and loss distribution – State how profits and losses are to be shared.
Decision-making process – Provide a mechanism for resolving disputes.
Exit strategy – Provide for possible exits, such as buyout provisions and dissolution terms.
In the absence of a formal agreement, the partnership will be governed by Australian common law, which may not be to your business advantage.
Register Your PartnershipTo be legally able to operate, your business partnership needs to be registered with the Australian Business Register (ABR) and might need to be registered with the Australian Securities and Investments Commission (ASIC) (ASIC). It is also worthwhile registering for an Australian Business Number (ABN) and Goods and Services Tax (GST) if your turnover is more than $75,000 per year.
Operating Risks in a Business Partnership
Protection of Financial and Legal LiabilityDiffering from companies, partnerships have no protection of partners' liability. This implies that:
All partners are individually liable for business obligations.
A partner's financial choice may affect the other partners.
You may want to consult a legal adviser to investigate limited liability arrangements or other structures like a proprietary limited company (Pty Ltd).
Dispute Resolution MechanismsRegardless of how robust a friendship is, there are bound to be disagreements. Have a dispute resolution procedure, including:
Mediation through a third, impartial party.
Arbitration for legally binding decisions.
Defined steps for breaking up the partnership without damaging the business.
Insurance and Risk ManagementTo protect your partnership, obtain:
Public liability insurance – Defense against third-party claims.
Professional indemnity insurance – Protection for mistakes and neglect in service enterprises.
Business interruption insurance – Money to help out if the business experiences unforeseen interruptions.
Maintaining a Strong Partnership Without Straining Your Friendship
Open and Transparent CommunicationCommunication is key to any successful relationship. Schedule regular meetings to discuss:
Business performance and financial health.
Future goals and strategic direction.
Personal concerns that may affect business operations.
Set Boundaries Between Business and FriendshipDefine when to discuss business and when to keep personal relationships separate. Avoid discussing business matters in social settings to maintain a healthy balance.
Plan for Growth and ChangeBusinesses change with time. Review and update your partnership agreement from time to time to provide for:
A partnership with a friend can be extremely rewarding, but without proper structure, it can turn into a financial and legal nightmare. By having a good partnership agreement, communication, and professional guidance, you can save both your business and your friendship.
Do you need expert legal advice on structuring your partnership?
