Steve Jobs once said: “Great things in business are never done by one person. They’re done by a team of people.”
When it comes to business partnerships, there was never a truer word said.
If you’re a business owner who is looking to enter a partnership, or simply here to learn more, this blog will cover some of the main aspects of business partnerships and explore some of the benefits and things to watch out for along the way.
First, What is a Business Partnership?
Business partnerships can take many different shapes and sizes.
Essentially, a business partnership is the relation which subsists between persons or entities carrying on a business in common with a view of profit.
Wherever you see a business partnership, whether it’s between two large corporations or even small businesses or individuals, there will usually be a partnership agreement underpinning it. The agreement itself will outline the nature and scope of business operations, ownership stake, decision-making, and financials. Where there is no partnership agreement in place, the partnership will be governed in accordance with the provisions of the Partnership Act (1895) WA.
Who Can Join a Business Partnership?
Technically, business partnerships can be made between any two or more people or entities who wish to do so. Generally speaking, there are three different types of business partnerships that people can enter into:
- General partnerships (GPs) are agreements that allow for equal responsibility for the management of the business and there are no limits to the liability pertaining to debts or obligations which may arise as a result of the partnership.
- Limited partnerships (LPs) are designed to connect general partners whose liability and obligations are limited by the amount of capital they contribute to the business. Limited partners are often investors who are not involved in the day-to-day running of the business.
- Incorporated Limited Partnerships (ILPs) are partners who obtain limited liability for certain debts associated with the business, whilst trading through an incorporated entity.
Why Enter a Business Partnership?
Business partnerships are attractive for a number of reasons.
Many businesses will engage in partnerships for making a profit, expanding into new markets, for tax reasons, or sometimes for mere convenience. Companies also enter into partnerships to take advantage of resource-sharing capabilities, including knowledge and expertise which can improve a company’s strategic and long-term goals.
What Defines a Partnership under Australian Law?
Depending on which state your business/es are registered in, different partnership laws will apply. In Western Australia, the Partnership Act 1895 (WA) defines a partnership as “the relation which subsists between persons carrying on a business in common with a view of profit.”
In determining whether a partnership exists or not the courts will look at the “true contract and intention of the partners as appearing from the whole facts of the case.” If the parties to a partnership agreement are corporations, then the Corporations Act 2001 (Cth) may also apply.
Partnerships vs Joint Ventures: What’s the Difference?
The term joint venture is often used synonymously with business partnerships, and while the two can often refer to the same agreements, they actually have a subtle difference that’s important to understand.
A joint venture means when two or more entities join together for a project. Conversely, business partnerships refer to the legal relationship between entities that are carrying out business activities (usually) with the common goal of generating profit. While joint ventures are usually created specifically for a time-bound project with a single goal, partnerships are often ongoing.
Risks of Joining a Business Partnership
While there are many advantages for companies looking to enter into partnerships, it’s not without risk. Here are some of the main risks to be aware of:
- Liabilities – while business partners are set up to enjoy and share profits, they are also set up to share losses and debts, when they occur. This may be challenging for some businesses, especially in the early stages of the partnership. Essentially, as a business partner, you will also be liable for decisions made by your business partner.
- Issues selling in the future – while a partnership may be serving your business needs in the near and medium-term, the economy is a dynamic and evolving marketplace that might not be as favourable as it is right now. This can prevent some issues down the line especially if one side of the partnership is not interested in selling.
- Less independence – when you enter a partnership you automatically forgo some of your rights to another party. This can be a challenging process for businesses that are used to a particular point of view or approach. Remember that every partnership will require compromise.
Legal Considerations When Entering a Partnership
Before you sign on the dotted line, it is important to ensure you’re doing so on firm legal advice. These days it’s rare for business partners to steward the company and ensure their legal footing is secure. That’s why hiring an experienced commercial litigation lawyer to ensure your future business partnership agreement will be a success for both sides. If you’re thinking of partnering up with another business or entity, make sure you contact qualified Perth lawyers to go over the details. It’s always better to be safe than sorry.