|
NEWS - PLANNING
The pros and cons of a partnership
5/21/2002
Deciding to become a partner in a new retail business that has the hallmarks of financial success can be intoxicating, particularly if the potential profits outweigh the normal weekly wage.
That is the sort of offer made to many employees from time to time in retail businesses. Take the following example with whereby an offer is made to Jane, an employee in a retail business run by Catherine. Although the shop Jane has worked in for a couple of years is profitable, Catherine wants a change and has decided to sell up and open a new venture. As she has known Jane for many years, she has asked her to become a partner, investing half the capital.
Superficially, a partnership is the cheapest and quickest way to set up a business. Unlike a company, no legal requirement exists for the partnership itself to be registered. And it saves the $800-$1,000 incorporation costs associated with setting up a company.
By doing nothing formal, however, the partnership falls automatically under the provisions of each state or territory's Partnership Act, a standard set of rules which govern the partnership in the absence of an agreement to the contrary.
After speaking to an accountant and solicitor, as well as contacting the state business advisory centre - each state and territory has one - Jane becomes aware of some of the more restrictive aspects of relying just on the Partnership Act. For instance, if one partner is run over by a bus, the business will dissolve the minute the partner dies. Also, both women have different levels of experience. Unless formalised, the more experienced partner could end up becoming the boss.
"It's those type of power relationships and areas of responsibility that do cause a lot of tension in partnerships. If it's not clear from outset what each does, it can create conflict," the author of How to start a small business in the real world, John Pospisil, said.
An option is to draw up a partnership agreement.
As Martin Przybylski, a partner at Deacons Lawyers explains: "Going into partnership means you're going into business with other people and the fundamental starting point has to be what the relationship is between you." In addition, an adviser can raise issues that people would not automatically think of when setting up a partnership. "If you have a falling out, for example, and there is a partnership agreement, then provisions can exist for one party [or parties] to maintain the business when perhaps another partner wants to dissolve it," Mr Przybylski said.
In this case, the fact that Jane and Catherine are not related is a reason why Greg Hayes, a senior partner with Hayes Knight, recommends a partnership agreement. The other reason is the possibility that the partners might have different aspirations. The cost of a partnership agreement will depend on the complexity of the partnership. A simple agreement may cost as little as $500 to $600, anything more time consuming could cost in the thousands.
Another consideration for anyone thinking of a partnership is the unlimited liability they face. Partners do not have the comfort of limited liability like a company. "You can really only rely on insurance because partners are liable to anybody who deals with the business," Mr Przybylski said.
Small businesses can avoid the unlimited liability issue by setting themselves up as a company, a task not as onerous as it was in the past.
"You can incorporate a company within a couple of hours. It costs you $800 to $900 and you have the extra advantage of limited liability. You don't have to prepare and file formal accounts with ASIC, although you do have to do an annual return which basically says the company still exists and the directors sign a declaration that it's solvent," Mr Przybylski said.
Although partnerships are still popular among microbusinesses because of the simplicity of setting them up, liability issues have made them less popular than they were.
|
|
|
