Partnership Agreements - Simple and Flexible Business Vehicles (Vic.)

Unlike a company, a partnership can be very informal.

The only real test is whether the parties were carrying on a business in common with a view of profit as defined in the Partnership Act.  For taxation purposes it simply amounts to the joint receipt of income.

Unlike a company, a partnership is not a separate legal entity.  It does not pay tax. Tax is paid by the individual partners in their own tax returns; although a partnership return is required.

However, Victorian law does generally treat a partnership's structure as though it were an entity or a person, for instance, Victorian law enables registration of a business name, or name for a firm, and permits the partnership to trade under that business name. 

Partnerships are fairly common types of business organizations. Their popularity is largely due to the simplicity of forming a partnership and the flexibility of carrying on the business.  For example, if the partners all agree, they can change the nature of the business, change their entitled share to profit, and change any other matters within the scope of the partnership.

Partnerships have advantages over sole person ownership where an individual operates a business pursuant to a business name.  A partnership has the combined financial resources of the partners plus accumulated experience of the partners. 

There are many types of partnerships.  Some partnerships range from mega-firms of accountants and lawyers with up to 1,000 members scattered across different continents to the local fish and chip shop run by a husband a wife partnership.  The general law of partnership with governs each of these businesses is essentially the same. 

Generally the partnership agreement will provide that profits as well as losses must be shared amongst the various partners.  Accordingly before clients enter into partnership agreements a risk management audit should be undertaken.  Methods of transferring or reducing risk should be investigated.  A way of transferring risk may be a contract with suppliers, liability insurance, an exemption clause or by requiring the other contracting party to give the partnership an indemnity. 

A way of reducing risks which cannot otherwise be transferred would be arranging relevant insurance such as public liability, professional indemnity, directors and officers or product liability insurance.  The type of insurance will depend upon the type of business in which the partnership is engaging.  Not all partners have to be working partners.  Working partners are generally referred to as salaried or sharing partners.  However, silent partners take no active part in the management of the partnership business.  Sleeping partners can be a full partner in every other respect.  While a silent partner may be in a secret or concealed position, the silent partner will be bound by acts of the other partners acting within their authority as defined by the partnership agreement. 

Generally, partnerships will be unlimited.   This means that any liability which one part attracts will be the shared responsibility of all other partners without limitation. However, the Partnership Act 1958 (Vic.) provides for limited partnerships as a form of business organization to provide a further alternative to running a business as a company or association.  Recently, limited partnerships have been used for many ventures requiring risk capital and entrepreneurial initiatives such as agricultural and industrial development.

A limited partnership consists of general partners and limited partners.  General partners are directly responsible for the limited partnership and face unlimited liability jointly and collectively for all debts and obligations of the partnership.  Limited partners are passive investors who do not normally take part in management.  They do have the power to participate in management and, if they do, they face the same unlimited liability as general partners.  Otherwise their liability to contribute to debts and obligations is limited to their contribution to capital.

Victoria also provides for unincorporated limited partnerships or venture capital limited partnerships, see the Partnership Act 1958 (Vic.) Part 5, aided by the Partnership (Venture Capital Funds) Act 2003 (Vic.).  This legislation creates an incorporated limited partnership for the purposes of obtaining venture capital funds, especially from overseas, for high risk investment in new areas of economic activities. Incorporated limited partnerships are partnerships where the partnership is a separate legal entity from the partners. 

Venture Capital Limited partnerships consist of up to 20 general partners who manage the partnership and have unlimited liability.  These partnerships also have at least one and up to any number of limited partners who contribute investment capital, do not take part in management, and have liability limited to capital or property which they agree to contribute to the partnership.  The creation of Venture Capital Limited Partnerships follows changes to federal income tax laws in 2002.  The Taxation Laws Amendment (Venture Capital) Act 2002 (Cth) provided tax benefits and capital gain tax exemption to venture capital partnerships existing for between 5-15 years with committed capital of at least $20M. 

One general principle of partnership law, often misunderstood by clients, is the general rule that one partner's acts will bind the other partners.  As with all general rules, there are exceptions. For instance, if any act done or document signed is done or signed for an individual partner's own benefit, it will not commit the firm even if it is related to the partnership business.  This means that the other partners would need to show, in order to avoid a transaction that they did not agree to enter, that the transaction was entered into not on their behalf but rather by the renegade partner as principal on that person's own behalf.  This is sometimes easier said than done!  Victorian partnership law assumes that an individual partner will have the implied authority or power to buy goods on account of the firm, to borrow money, pay debts and to make and sign cheques and other negotiable instruments in the name of the partnership. 

Victorian law, however, will assume that individual partners do not normally have the power to conduct certain activities such as: commencing legal proceedings on behalf of the partnership; opening a partnership bank account in the partner's own name; increasing the capital of the firm; settling partnership debts; to admit new partners or expel existing partners; to mortgage partnership property.

Often clients enter into arrangements without legal advice which proves inadvisable or extremely costly when trying to extricate themselves from it.  Whenever you are considering any form of business structure always seek competent legal advice from LAC Lawyers, Melbourne or Sydney before doing so.