When you start growing your business, or even right at the idea stage, you might consider setting up a partnership or company, rather than going it alone. Often two heads are better than one, and it’s easier to attract investors and creditors with these structures rather than as a sole trader. But a partnership relationship is not a relationship to be taken lightly… would you marry them?? A general partnership can be much like a marriage in that each partner is liable for the debts of the partnership. It will mean that you share equal rights and responsibilities surrounding the business operations and management, but also have unlimited personal liability for the actions and debts of the other partners and business. (This is most like a marriage!).
One of the best ways to make sure you protect yourself and make the relationship clear is to have a partnership agreement drafted. This will set out your relationship with each other, and really get to the nuts and bolts how it will work. For example, what amount of money is your partner allowed to spend on the business without telling you? And what amount of time and effort are each of you devoting to the business. When you go through the process of asking these questions it really highlights whether you are on the same page. It’s no fun being in a lopsided partnership where you feel like you’re doing all the work, and getting little back. Particularly at the beginning when the business hasn’t got a consistent cash flow. If things get tense, it’s much easier to go back to a written agreement to make sure your partner is holding up their side of the bargain. Having said that, many marriages would also be more successful with a written agreement where each other’s obligations are clear. “ I will cook 3 nights a week, and you will cook for 3, and we will go out to eat on the other night! “ etc. “Each person is responsible for their own laundry!” “Whoever undertakes the bathroom cleaning is entitled to a foot massage”. Ahhhhh!
A partnership is a cheaper and easier structure than a company to set up, and it has fewer legal requirements, and less regulation. However, a general partnership doesn’t come with the benefit of limited liability. So, if the partnership is in debt or is sued, all the partners are liable and may have to pay the rogue partner’s share. It also dissolves if a partner dies, unlike a company structure which remains.*
When deciding whether to set up a general partnership or company, usually people will set up a company because of its main benefit; the limited liability structure. Limited liability means that shareholders are generally not responsible for the company debts, and can limit their personal liability. This is especially useful if you have personal assets such as a family home or investment property.
A company is like another person; it is a separate legal entity to you as an individual. This in effect means that it can incur debt, and sue and be sued. You can set up a company to run your business so that your business is somewhat removed from you as an individual. Companies are set up with ASIC, and the laws that govern companies are set out in the Corporations Act 2001. These laws are extensive, and complex, so it is important that if you are unsure of any matters relating to your company set up or obligations you do see a lawyer.
A company structure generally involves directors who take control of the management and financials of the company, and shareholders who own the company. A director doesn’t’ need to be a shareholder and vice versa. Some factors to consider if you decide to set up a company rather than partnership are the costs of set up, and the ongoing expenses for compliance and company tax returns.
You also need to consider what your obligations are as a director of the company. As a director some general duties include the obligation to exercise your powers in the best interests of the company. The primary duty is to the shareholders here. Then, there is the duty to ensure you can pay your debts as and when they become due. And you need to ensure you are properly informed about the financial position of the company and keep proper financial records.
The shareholders of your company will also have various obligations, including to pay any unpaid amounts on shares, and to comply with any obligations in the company constitution and shareholders agreement. And they have various rights including the right to vote on key issues at shareholder meetings.
If you need assistance on deciding between a partnership or company structure; formalising a partnership, setting up a company, or drafting a shareholders agreement, please contact us.
*Note that there are other types of partnership, not just a general partnership.