Partnering up

Could forming a partnership boost your business prospects? Ashurst Partner, David McManus talks through some of the fine print.

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Forming a partnership can be a great way to boost your business prospects, so here are some key things to consider before you take the step.

Ashurst Partner, David McManus highlights some of the key legal issues to consider when entering into a business partnership or joint venture.

Q: For businesses looking to team up with others to maximise business opportunities, what legal considerations must be addressed when forming a partnership?

A partnership involves two or more participants carrying on a joint undertaking or business in common, with a view to profit. Partners are liable for the actions of the other partners in the scope of the partnership business, so it’s essential you know and trust your partners.

A partnership isn’t a separate legal entity. Rather, the venture is conducted by the partners jointly, with the profits (or losses) of the partnership shared among the partners. Partners can decide among themselves how profits and losses are shared.

Generally, partnership assets are held by one partner in trust for the other partner or partners. Alternatively, the partnership can appoint a nominee company to hold the assets on behalf of the partners.

Q: When entering a business partnership, how should the contract look?

The contract governing the terms of the partnership is known as the partnership agreement – this can be a short, simple document or a highly complex one. Partners are free to decide on the terms of the partnership agreement, subject to the rules of the relevant state’s Partnership Act.

Where partners make non-financial contributions to the partnership, the partnership agreement should give a clear method for determining how each of these contributions is measured.

When entering into a partnership, consider how disputes or breaches will be worked out. It’s prudent to agree on dispute resolution mechanisms to ensure that deadlocks can be resolved, that the business of the partnership can continue despite breaches and, in the event of the dissolution of the partnership, that assets can be allocated appropriately among the partners.

Q: What would you say are the three key benefits of a partnership?

  1. Partners can pool assets, resources and expertise to offer a broader range of services. They share the profits of the partnership business – not the product of the business, as would be the case for unincorporated joint ventures.
  2. Each partner is responsible for his or her own funding, so partners can source financing outside the partnership to fund their respective contributions.
  3. Partnerships aren’t taxed; instead, each partner is taxed directly on his or her share of the partnership’s taxable income and can deduct his or her share of partnership losses against other income.

Q: Are there disadvantages you should consider before entering a business partnership?

Partners are responsible for the liabilities of the partnership, meaning they could be financially liable for each other’s actions. Also, fiduciary obligations – meaning obligations of trust and confidence (such as the obligation to act in the interest of other partners in relation to the partnership business) – exist among the partners.

Q: Can you explain the alternative to business partnership – unincorporated joint ventures?

An unincorporated joint venture is another common structure adopted by people looking to team up to maximise business opportunities. Key features are:

  • The joint venture is formed under a joint venture agreement and key decisions are made by a management committee. There are no statutes governing the contents of a joint venture agreement.
  • Participants don’t share profits – they receive a share of what the business produces. However, a joint venture can be structured so that these products are pooled and sold on behalf of all participants, after which the sale proceeds can be shared.
  • Participants jointly own the assets required to operate the joint venture.
  • Participants are liable to fund the joint venture in proportion to their participating interest, and failure to do so can lead to dilution of their joint venture interest. Alternatively, if one participant is willing to fund the joint venture, that person may be able to ‘earn’ an interest in the joint venture, including an increased interest in its assets.
  • Generally, participants aren’t liable for the actions of the other participants and can’t be bound by the other participants.
  • Participants maintain more certainty in relation to their own tax positions because they’re only responsible for their share of the participating interest.

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