The start of the new year is a great time to jump into new things – planning a holiday, joining a gym, or finally starting that new business you’ve always dreamed about.
When starting a business with a friend, colleague or family member, it’s easy to get caught up in the excitement and jump headlong into it, without dealing with ‘the boring details’ first.
We have seen a recent spike in enquiries about partnership disputes, many of which could have been avoided had the parties taken precautions, and understood their rights, liabilities and obligations.
One common way people go into business together is by a ‘partnership’, which in Queensland is governed largely by the Partnership Act 1891 (Act).
What is a partnership?
A partnership is an agreement between 2 or more people, to co-own a business and share in the profits.
A partnership isn’t a separate legal entity, and a key feature of partnerships is that while partners share in profits, they also are liable for all debts, liabilities and obligations of the partnership.
This may include for example ongoing liability for rent under a lease, even though the term ends and rent is due after a partner leaves, as well as liability for loan repayments, tax matters, utilities (phone and electricity contracts etc.).
What are the obligations of business partners?
Partners have strict obligations at common law and under the Act, including that they:
- must act in good faith and deal fairly with other partners;
- must put the interests of the partnership above their own business interests;
- must not operate any competing business (or must pay those side profits to the partnership if they do!);
- remain liable for the debts and obligations of the partnership.
Do we need a written contract to form our partnership?
Parties in a dispute often tell us that there is no partnership or no agreement because there is no written contract, but a partnership agreement can be formed orally by the partners, and by their conduct.
New business partners might think everything will go smoothly between partners, with no major disputes, just loads of profit, and there is no need for a written agreement or planning.
However, even with the best of intentions, things don’t always go to plan, and the smart way to minimise your risk and protect yourself is to speak with your accountant and your lawyer, to document your partnership agreement and ensure you plan properly for your tax, financial and legal obligations.
A good partnership agreement will set out:
- how long the partners intend to operate the partnership;
- each partner’s upfront contribution;
- each partner’s share of the assets, profits and liabilities;
- how a partner can exit the partnership; and
- the arrangements after a partner exits.
Can one partner walk away from the partnership?
A partnership can only be dissolved in certain ways, commonly the death or bankruptcy of a partner, or by the agreement of the parties. If things turn ugly, an Order of the Court may be required.
If a partner wants out, it’s not simply a matter of shaking hands and walking away, the parties must agree how assets will be distributed, debts paid and ongoing obligations accounted for, and who is responsible for cancelling bank accounts, finalising tax returns, and cancelling utility accounts.
Partnership creditors must also agree to release an exiting partner from liabilities, and you should make sure the release is documented so you avoid any nasty unexpected bills in the mail in the future.
If loose ends are not tied up, a partner might find themselves in Court and facing the stress, time and legal expense of litigation, including with their former partner or their creditors.
Don’t risk it, speak to a commercial lawyer in Cairns who can assist with your partnership agreements and planning. We also have a team of tenacious litigation lawyers standing by if disputes arise.
Please contact us on 07 4052 0700 if you would like to discuss your partnership, new business, or dispute.