The ins and outs of forming a business partnership
Published in: November 2017
Under the provisions of the Partnership Act (the Act), a partnership essentially symbolises the following:
We should also quickly note, that all States and Territories have the Act within their respective jurisdictions.
There are many forms in which a business can take, with one of the more popular being that of a partnership. However, when undertaking a partnership, there are number of considerations to be aware of to ensure that your business, is indeed a partnership if that is your intention.
How is a business partnership defined?
The definition of a partnership within the various State and Territory Partnership Acts (the Act), essentially means that a business is carried on in common, and with a view to profit.
Partnerships can come into being upon the moment a business plan comes into fruition and can also come before the partnership actually deals with members of the public.
It’s also important to know that a partnership can also be considered as such, in enterprises that aren’t profitable. Generally speaking, the main consideration in the formation of a partnership within the Act is that it is being carried on with a view to profit.
How is a partnership determined?
Just merely stating the fact that a partnership exists may not be enough in determining the existence of a partnership. Alternatively, a partnership may still have formed even in instances where the parties have explicitly stated otherwise. Therefore, if parties share in the net profits of a business may be viewed as evidence of a partnership.
For a more tangible definition of a partnership, s 6(1) of Queensland’s Act outlines the rules in determining the existence of a partnership by having a regard to the following:
“(1) In deciding whether a partnership does or does not exist, regard must be had to the following rules--
(a) joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything held or owned jointly or in common, whether the tenants or owners do or do not share any profits made by the use of anything held or owned jointly or in common;
(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived;
(c) the receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make the person a partner in the business, and in particular--
(i) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not itself make the person a partner in the business or liable as such;
(ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not itself make the servant or agent a partner in the business or liable as such;
(iii) a person being a deceased partner's child or spouse, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such;
(iv) the advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such;
(v) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by the person of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.”
The general requirements in forming a partnership
A business partnership can be formed by agreement between the parties either orally, in writing, created under seal, or inference can be made by the course of dealings among the parties.
Section 115 of the Corporations Act 2001 (Cth) states that no more than 20 people can be part of the partnership unless it is incorporated, or formed within certain professional groups. However, s 103 of the Corporations Act does also states that partnerships exceeding 20 people, does not necessarily invalidate the partnership.
Can a child become a business partner?
It may be difficult to believe, but a minor under 18 years of age can become a partner. So the obvious question is: Can a child enter into a contractual relationship with outside parties? For the most part, a child who enters into a contractual relationship with a third party can do so and may not be liable for any debts of the partnership in relation to private assets. Alternatively, adult partners are able to make an application for the whole of the assets within the partnership, including any capital contributions made by the child in the servicing of all debts of the partnership.
In the majority of jurisdictions, a child in a partnership who turns 18 years of age must repudiate the agreement within a reasonable time or they will eventually incur the same liabilities as an ordinary partner. Although, the position in New South Wales may differ from other jurisdictions due to the provisions found within the Minors (Property and Contracts) Act 1970.
Contact Eddy Neumann Lawyers on (02) 9264 9933 or