Partnership duties and agreements

What is a partnership?

A partnership is a contractual business relationship between two or more people who operate as co-owners and share equally in the profits and liabilities generated by the business. Each partner is responsible for the actions of the other partner(s). Partnerships are governed by the Partnership Act 1891 (Qld) (the Act).

Compared to other business structures, a partnership is easy and inexpensive to set up, and has fewer reporting requirements. The partnership lodges a tax return annually, with each partner paying tax on their share of the partnership’s income.

The benefits of a partnership include access to a greater amount of capital via collected capital and increased borrowing capacity, as well as the strength of collective knowledge, skills, experience and connections. A partnership also allows the partners’ business affairs to remain private (certain documents do not need to be made available for public inspection).

However, there is the potential for partnership disputes due to the fact that each partner in a general partnership is “jointly and severally liable” for the partnership’s debts.

The different types of partnerships

There are three types of business partnerships — general partnerships, limited partnerships and incorporated limited partnerships. Each type has its own features and requirements.

A general partnership is appropriate when two or more people want to run a business together and need a simple business structure. A general partnership does not need to be registered.

A limited partnership is appropriate when a business needs to raise capital, such as for projects in real estate, mining or entertainment. A limited partnership must be registered and have at least one general partner and one limited partner. General partners are responsible for the day-to-day management of the business and have an unlimited debt liability. Limited partners do not take part in the business’s management and their debt liability is limited to the amount they contributed to the partnership.

An incorporated limited partnership is appropriate for a business that wants to execute a venture capital project. Venture capital projects are high risk but offer high returns. An incorporated limited partnership is a complex structure which must be registered and have at least one general partner and one limited partner.

What types of businesses operate as partnerships?

A partnership combines the expertise and resources of its partners to help a business succeed. This type of business structure can be used in almost every industry including hospitality (e.g. a restaurant chef with a delivery driver), construction (e.g. a builder with a building certifier), and finance (e.g. a financial planner with a mortgage broker).

What information is included in a partnership agreement?

Generally, all partners are equally responsible for management of the business, as well as its debts and profits. A partnership should have a written partnership agreement that provides the specifics of how the partnership is to work.

A partnership agreement commonly includes these sections:

Partnership details

This can include the names of the partnership and its partners, the partnership’s principal office, the capital contributions of each partner, and specifics about how partnership profits and losses are to be shared.

Roles and responsibilities of each partner

This can include voting rights, notice of withdrawal, a non-compete clause, and specifics about who can hire and fire employees.

How debts and liabilities will be managed

This can include the types of debts and expenses that require consent from all partners, meeting frequency, and specifics about who can sign company documents such as contracts and cheques.

How to deal with partner changes

This can include the process for admission of a new partner, for the voluntary or involuntary withdrawal of a partner, and for the buyout of a partner.

Dispute resolution

This can outline a process for dispute resolution, which may involve options such as negotiation or mediation.

Dissolution

This can include when the partnership may be dissolved; and how assets and liabilities are to be distributed if the partnership is dissolved.

What are the duties of a partner in a partnership?

Business partners owe a fiduciary duty to each other, based on loyalty, trust and confidence. This duty means that each partner must act in the best interests of both the partnership and the other partners.

The Act specifies the rules that apply to partners. These include:

Profits and losses

All partners are entitled to equally share in the capital and profits of the business and must contribute equally to its losses. If a partner dies, their estate becomes liable for debts the partner incurred in the partnership. If a partner retires, they may still be liable for debts they incurred in the partnership, unless there is an agreement with the business and its creditors to discharge the partner from the liability.

Indemnity

The business must indemnify each partner for payments made (and personal liabilities incurred) in the ordinary running of the business or anything done to preserve the business or its property.

Management

Generally, every partner may take part in managing the business but no partner is entitled to be paid for this. Any differences that arise in the day-to-day running of the business can be decided by a majority of the partners but no change may be made to the nature of the business without the consent of all partners.

Accounting

Partnership books need to be kept at the principal place of business and be available for every partner to inspect and copy. A partner must account to the business for any benefit they gain from a transaction concerning the partnership, or from using the partnership’s property or business connection, without the consent of the other partners.

Dissolution

If a partner dies or becomes insolvent, the partnership is dissolved. A partner can apply to a court to dissolve a partnership in situations such as when a partner is found to be of permanently unsound mind, or is persistently breaching the partnership agreement, or when the business can only be conducted at a loss.

Competition

If a partner, without the consent of the other partners, runs a competing business, they must account for and pay to the partnership business all profits made in the competing business.

For when you need help

If you need legal advice or representation in any matter involving a business partnership, call Gibbs Wright Litigation Lawyers for a free and confidential discussion about your legal rights and options.

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