In many ways the partnership is the logical next step from the sole proprietor. The Victorian Partnership Act 1958 defines a partnership as the relationship that exists between people who are 'carrying on a business in common with a view of profit' (s. 5).
As a business structure a partnership is simple, flexible and, if properly set up, an effective arrangement. Whether it suits your business needs will depend on your circumstances and requirements.
The advantages of a partnership arrangement are:
- it is a simple structure both legally and financially;
- flexibility - many of the provisions of the Act can be changed to suit your particular needs;
- that each partner can bind the other partners in contract;
- the partnership pays no tax though it must still lodge a tax return;
- profits are shared among partners in whatever proportion they decide and each pays tax on them at the personal rate;
- no special partnership reports or returns other than a partnership tax return are required; and
- that it only has to be registered if its official name is different from the names of the partners.
The disadvantages of a partnership are:
- the liability of the partners for the debts of the business is unlimited, as it is with sole proprietorships;
- each partner is 'jointly and severally' liable for the partnership's debts (that is each partner is liable for their share of the partnership debts as well as being liable for all the debts; see 'Liability' for partnership debts, below);
- sometimes the law can decide that a partnership exists even though you haven't intended to form one;
- if partners join or leave, you will probably have to value all the partnership assets, which can be costly; and
- if partners join or leave, the Taxation Office treats the partnership as having terminated and requires a special tax return to be lodged.
Partnership agreement can be verbal, in writing or may be implied by the conduct of the partners. There is no legal requirement for partners in a business to draw up a partnership agreement, but it is advisable to have the partnership agreement in writing if the partners intend to operate the business over an extended period. Your accountant or legal adviser may be able to draw up a partnership agreement for you.
It is a valuable exercise for partners to sit down together and draft, in plain and simple language, how they want the partnership to work. In the absence of such agreement the Partnership Act 1958 (Vic) provides fallback provisions of what should be included in the agreement. These may not always be things you want in the partnership agreement. For example, the Act expects the profits and losses to be shared equally among partners but you may want a different arrangement. Similarly, where the Act expects all partners to share in management, your partner may live a long way from your operation, making shared management impractical.
It is significant that Consumer Affairs Victoria (CAV) recommend on their website that partnership agreements should be in writing. This is good advice.
To view a web page containing further information on Partnerships go to the CAV website - www.consumer.vic.gov.au.
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