Sure, some of the most renowned companies in recent history have had celebrated figureheads who have become synonymous with their enterprises, such as Bill Gates and Steve Jobs for example. However, both Gates and Jobs when starting off their companies, also had partners in their respective ventures, and it’s not uncommon for small businesses to begin life as a partnership.
If you’re considering starting a business as part of a partnership, there are a number of things to be mindful of to ensure that the business can be considered as a legal partnership.
What is a business partnership?
Let’s deal with the easiest part first; which is the question of the meaning of a partnership.
Under the provisions of the Partnership Act (the Act), a partnership essentially symbolises the following:
- a business that is being carried on in common; and
- a business that is being carried on with a view to profit.
We should also quickly note, that all States and Territories have the Act within their respective jurisdictions.
When does a partnership begin?
A partnership can begin from the moment the parties initiate a business plan, which may come before the time when the partnership begins dealing with the public at large.
It’s important for readers to be aware that partnerships can still be considered as such, even if the enterprise isn’t profitable; the main consideration as stated within the Act is, that the partnership is being carried on with a view to profit.
When can the existence of a partnership be determined?
One might assume that the necessary requirement in the establishing of a partnership is when the parties declare, that they are in fact partners. However, there may be instances where a partnership has still been formed, even when the parties have explicitly stated that they have no intention in creating a partnership. So for the most part, if the parties share in the net profits of the business, such an act may be seen as evidence of the existence of a partnership.
For a more tangible statutory definition of a partnership, we can turn to s 6(1) of Queensland’s Act as our example, which outlines the rules in determining whether or not there is 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.”
What are the basic requirements in forming a partnership?
Like other legal relationships, a partnership is formed by agreement between the parties and can be done either orally, by writing, created under seal, or inferred by the course of dealings amongst the parties.
Furthermore, under s 115 of the Corporations Act, the maximum number of people that are able to form a partnership is 20 – unless the partnership is incorporated, or is formed within certain professions, such as medical practitioners or chemists for example.
We should also add, that in s 103 of the Corporations Act, if the number of parties that have formed a partnership exceeds 20 people, this does not make the partnership invalid.
Can a child become a partner in a business?
Believe it or not a child under the age of 18 can become a partner in a business, and the ability of a child to become a partner leads us to the obvious question of what happens if they enter into a contractual relationship with outside parties? Well, generally speaking a minor who enters into a contractual relationship with a third party, can do so and may not be liable for any of the debts of the partnership in regards to their private assets. On the other hand, the adult partners can also make an application for the whole of the assets within the partnership – including any capital contributions made by the child – to service all of the debts of the partnership.
In most jurisdictions a child in a partnership who turns 18 must repudiate the agreement within a reasonable time or they will eventually incur the same liabilities as an ordinary partner. We should highlight that the position in New South Wales differs from other jurisdictions due to the provisions of the Minors (Property and Contracts) Act 1970.
If you have any further questions or inquiries in regards to starting your business, please seek the help of a legal practitioner who will help get you started.