Previously, I’ve written that being a sole trader was like living in a little studio apartment; there is no separation between you and your business.
Today when I talk about partnerships I want you to imagine that the kind of building you are living in with your business is a freestanding house within a gated community. You have freedom to expand or change your home but must do so within the rules of the community.
In essence, a partnership is two or more people running a business together, based on a formal (written) or informal (oral) agreement between them, with a view to making a profit.
Share Business Costs. One advantage of a partnership is that it can be an effective way to share business costs with someone else.
Access To Skills. Entering into a partnership can mean that you get to access to the skills of other people that you don’t currently have. (WARNING! See my comments under the Think Twice heading below)
Commitment. A partnership can ensure a degree of commitment from all of the partners to the future of the business.
No Legal Protection. As with sole traders there is no legal separation between your personal assets and business conducted by the partnership as the partnership is not a separate legal entity. You are personally liable for all your business’ debts (loans, salaries, taxes, etc) and can be made personally bankrupt to pay them if the business fails.
One For All and All For One. Each of the partners in a partnership is personally liable for the debts of the business. More importantly, partners are liable for the obligations and debts incurred by other partners when conducting business on behalf of the partnership. This means that if one of your partners enters into a contract on behalf of the partnership then all of the partners are committed to that contract.
No Tax Benefits. Partners pay tax on their share of the business’ profits at their personal tax rate, which is often higher than the corporate tax rate for companies(at the time of writing the UK corporate rate was 20 to 23% and the top personal rate was 45%. In NZ the corporate rate was 28% and the top personal rate was 33%). Be aware that although the partnership is not a separate legal entity it is required to file a separate tax return.
Out Of Date Law. In both NZ (Partnership Act 1908) and the UK (Partnership Act 1890) the law regarding partnerships is relatively old and sparse. Partnerships often require comprehensive partnership agreements in order to survive the kinds of changes most businesses go through during their lifetime.Note that both NZ and the UK now have the concept of a limited partnership (meaning that partners can limit their liability in the same way as with a company). You would need to speak to a lawyer to discuss if this kind of structure would be suitable for your business as there are restrictions that need to be followed.
Lose Control. As exciting as it can be going into business with your sister, best friend etc you are giving up control. You may both have different ideas of the direction that business should head in and different ideas of what to spend money on. Compromise is going to be needed.
The partnership is required to register with the relevant tax authority for both NZ and the UK. As the partnership needs to file a separate tax return to show each partner’s share of the profits and losses, the partnership will need to keep its own set of account.
The partnership itself does not pay tax on any partnership’s profits; rather partnership income is distributed to the partners and the partners then pay tax on their share of the income at their personal tax rate.
Unless you are prepared to read over the relevant Partnerships Act (and maybe get a law degree to be able to understand the language it’s written in!) you are going to need to get legal advice. If you decide to skip this step be warned that you could find that the Act overrides what you and your partner wanted to happen and that could leave you in a very uncomfortable situation.
Do you actually need a partnership? If you want the business skills of another person could you hire them as a contractor to do the work? If you need support in another way you may be far better off hiring a lawyer, accountant or business coach instead of forming a partnership with others.
If you’re interested in forming a company then come and read Do you have your own company? Nothing to it right? (right?!).
Come and grab your free copy of the Legal Health Workbook, designed to help you get clear on the legals you need in business, so you can begin to create a solid business foundation – and never have another sleepless night wondering if your legal ducks are in a row.
Disclaimer: This article is an educational resource designed to make you aware of some of the legal needs of your business. The information provided should be treated as a guide only and should not take the place of hiring a lawyer. Reading this article does not create a lawyer-client relationship between us. If you have a specific legal issue you need help with, you need to hire a lawyer.