Before starting a partnership – read this!
From Suzanne Brown, McKays Solicitors
Going into partnership to develop a great business idea is exciting! Before you rush in, here are a few essential questions to ask yourself.
1. Have you got the right structure?
People often loosely use the word “partnership” but there are various structures available to people who want to go into business together. For example, other popular business structures are a company or a trust.
Each structure will have its’ pros and cons. Your lawyer will provide advice on asset protection (so you do not lose your house) and succession issues. You should also seek advice from your accountant on taxation treatment of each of the options.
Partnerships are simple and cheap to set up and administer. However, one downside is that all partners are “jointly and severally” liable for business debts. This means that the partners together, and individually, are on the hook. You could wind up paying for a debt your partner incurred! Taxation wise, partners pay tax at their personal tax rates and there is no flexibility on who receives the income.
2. Have you got a partnership agreement?
Going into business with other people is like entering into a “commercial marriage”.
It is a serious commitment and, although things may seem peachy right now, unforeseen events could arise which may end the honeymoon early. What happens if you do not agree on something? How will decisions be made? What happens if one partner goes through a divorce – will you end up in partnership with his or her spouse instead? What if someone falls ill or passes away? What if someone can no longer contribute what they promised to at the start?
All of these considerations can be dealt with in a legally binding agreement – such as a Partnership Agreement, Shareholders’ Agreement or the like (depending on the structure you are using), which your lawyer can assist with. This may be a lot cheaper than dealing with a problem down the track.
3. Have you considered insurance?
You should talk to an insurance broker and/or financial planner about knowing you are covered by the appropriate insurance, should you get sued or something else unforeseen occur.
Apart from business insurance, you and your ‘partners’ could also consider having life insurance and insurance for trauma or total permanent disability. A Critical Event Agreement can put measures in place so that such an insurance payout covers the cost of a partner’s interest if one of these events occurs. For example, if your partner dies, a life insurance payout could be set up to go to this partner’s grieving spouse while you then automatically take over the business without having to come up with money to pay out the spouse. It is not enough to take out the insurance, but a legal agreement needs to be put in place to ensure that what you want to happen does happen in such events.
4. Have you considered leases, business names, patents, council approvals etc?
You need to ensure that you can legally operate your business and are protected from the possibility of others “stealing” your idea or closing you down. You also should get advice if you are looking at signing a lease so that you know your rights and obligations there.
For example, did you know that you cannot just choose a name and operate under it – you have to register a Business Name with the Australian Securities and Investment Commission.
Starting a partnership can be an exciting and rewarding venture. Before you say “I do” though, make sure you are fully informed of your options and have the correct measures in place to avoid detriment to you in the future.