A partnership is formed when between two and twenty people agree in writing or verbally to jointly carrying on a business in common with a view to a profit. Each partner is liable for the actions of the other partners. The Partnership Act 1891(SA) sets out the circumstances where the law assumes that people are in 'partnership'. Even if there is no intention to form a partnership, a number of people co-operating in a venture may be legally regarded as partners.
The Partnership Act 1891(SA) also specifies various rights and duties of partners. These include:
- each partner has an equal say in controlling the business unless they otherwise agree
- each partner can enter into a contract or create a liability which is binding on other partners as though they had created the contract or liability. Another person who deals with one partner can presume that all the partners will be equally and totally liable for anything that is promised.
- if a partner dies the partnership is dissolved, unless otherwise agreed
- all partners will share profits and losses equally, unless otherwise agreed
- one partner cannot be expelled by the other partners unless otherwise agreed
- a partner is only responsible for partnership debts and liabilities that arise after the person becomes a partner
- a partner who properly retires from a partnership remains liable for debts and liabilities incurred by the partnership before the retirement. A partner who does not formally retire will continue to be responsible for debts incurred after the retirement, see resignation of a partner
- if a partner is unable to pay her or his debts, or becomes insolvent, the partnership is terminated.
Some of the above assumptions can be altered by written, verbal or implied agreement between the partners. It is therefore advisable to have a written partnership agreement prepared by a lawyer. An agreement should state who the partners are and what share they each own of the partnership's capital as well as how much income each partner can draw and how much of the debts each will pay. The agreement may also specify that a particular partner is a 'silent partner' who contributes capital and shares in the income but does not otherwise assist in operating the business, although having the same responsibilities as the other partners.
Carrying on of business does not usually extend to hobbies conducted jointly by friends or joint family arrangements, such as the ownership of a car.
A partnership may be used to distribute the income of the business to the members of a family to minimise income tax. However, the Australian Taxation Office can require partners to prove they exercise real and effective control over the assets and profits of the partnership. The presence of a partnership agreement prepared by a lawyer and signed at the commencement of the partnership may assist as evidence of a genuine partnership.
A joint venture is not the same as a partnership. A joint venture is usually established for the purpose of a single purpose or project or a defined period of time, and is not considered to be a single separate entity which means that liability falls on each individual (although this may be varied by agreement). Joint venturers share in the product of the venture, whereas a partner will share in the profit, and joint venturers can (subject to agreement) sell their interest in the venture freely. Joint ventures are entirely governed by the common law (there is no specific legislation), and given the subtle differences which could give rise to a partnership, legal advice should be sought before business is commenced to avoid disputes about control and liability.
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