A partnership is one of many types of structures a business may take. It is typically considered one of the simplest and most common forms of business association. A thorough understanding of what a partnership involves will be valuable in the context of deciding whether it is the most appropriate structure for your business.
A partnership is a relatively straightforward form of business structure. In New South Wales, partnerships are governed by the Partnership Act 1892 (NSW), in addition to rules of equity and common law. A partnership is defined under section 1 of the Act as ‘the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership’. Thus, the two main elements of partnerships are:
- That it is a relationship based upon mutuality in business endeavours; and
- That the objective of the relationship is to turn a profit.
As per section 1(b) of the Act, a partnership cannot include relationships between members of incorporated companies or associations.
The Act and the case lawprovide a list of indicia by which a partnership may be identified. These include, but are not limited to, the parties’ characterisation of the relationship, the sharing of net profits and losses, the status of the principal, management participation, mutual trust and confidence, and the contribution to capital.(see eg Cox v Hickman (1880) 8 HL Cas 268) These features are not necessarily decisive or essential, but are nonetheless helpful when it comes to examining the business. Partnerships can therefore be differed from joint ventures and not-for-profit clubs and associations, the former being aimed at sharing product rather than profit and the latter utilising profit making activities for the benefit and purposes of the club or association.
There are several factors that must be considered when forming a partnership. One factor is the plethora of legal and tax requirements that must be fulfilled, extending from relevant taxation registrations to construction of partnership agreements and licences. Another, and arguably more significant, factor to be considered is what type of partnership your business should take. Partnerships may be either general partnerships, limited partnerships or limited liability partnerships. General partnerships are structured on the basis that each partner is equally responsible for the business, whereas the two forms of limited partnerships necessarily seek to limit partner liability.
The issue of limiting liability is of particular importance, as business partners are personally and jointly liable for business debts, and jointly and severally liable for wrongful acts or omissions committed in the ordinary course of the business of the firm or authorised by the partners. This is because partners are agents of the firm or business. (see National Commercial Banking Corporation of Australia Ltd v Batty (1986) 60 ALJR 379) It should not, however, be presumed that limited liability partnerships provide a completely impenetrable shield from personal liability.
An additional point is that, irrespective of the partnership structure, partners will owe a fiduciary obligation to each other and are required to uphold the highest standards of conduct. (see Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384) This emphasises the need to take care when selecting prospective business partners, as a partnership is a relationship that is presumed to be one built on mutual trust and confidence (see Cameron v Murdoch (1986) 63 ALR 575).
So, whilst the set-up of a partnership may be fairly simple, the intricacies of how partnerships are discerned and identified, as well as the rights and obligations of partners, is somewhat more complex. These issues should be carefully considered when deliberating the right structure for your business. For more information about deciding which business structure is right for your business check out this article.
This article was authorised by Warwick Heeson.