Partnerships in Business

Few people anticipate problems with partners when going into partnership in a business venture. There is a natural optimism for the future, but it can be disastrous to assume that each partner has the same understanding of the business vision and how the business will operate. To avoid conflict and misunderstandings, the business vision and the partnership relationship should be agreed item by item and formalised in writing.

A partnership is a relationship between persons carrying on a business in common with a view to making a profit.

Partnerships are covered by the provisions of the Partnership Act 1895 (WA).

Before going into partnership, intending partners should spend time planning and agreeing on a shared vision of the business they intend to create and how they intend to create it.

Without a shared vision that is documented in a written business plan or feasibility study, partners may think they are working towards a common goal, but each may have a different perception of where they are heading and how they will get there.

The process of preparing a business plan or feasibility study provides a good opportunity to see how the parties work together. It provides opportunities to assess the personality; values; management style; skills; compatibility; willingness to communicate, negotiate and compromise; and the strengths and weaknesses of the other party or parties.

Some of the issues that need to be considered in preparing a business plan or feasibility study include the products or services to be sold, the target market, the corporate image and values, the resources and financing required, and the goals to be achieved.

SBDC regularly conducts "Intro to Business Planning" or "Feasibility of Your Business Idea"   workshops. It also sells publications and has a free information sheet on business planning.

The Partnership Relationship:

The following are just a few of the issues that should be decided before going into a partnership:

the contribution by each partner of time, effort, money and assets;
the share of profits, and of losses;
partnership salaries; and
participation in management.
Management Issues

Before going into partnership, details of a whole range of management issues should be agreed upon. Agreement in broad principle is rarely adequate. Issues that should be settled include who will be responsible for each area of the business, the mechanism for reporting to other partners, and the holding of regular management meetings.

Management Meetings

Good management includes having regular monthly management meetings. For example, at the same time on the second Monday of each month, with standard agendas listing what issues will be discussed at each meeting. Minutes should be kept of each meeting of the decisions made, what action is to be taken and by whom.

Agenda items should include the tabling of financial statements for the past month and forecasts and plans for the current and future months. Partners should be accountable to other partners and report to the meeting on their areas of responsibility.

The Partnership Agreement

Every partnership agreement implies a term of good faith of each partner in all dealings involving the partnership.

A written partnership agreement is strongly recommended for all partnerships.

The section on partnerships in the SBDC's publications Business Structures Pack, and Guide to Operating a Small Business includes a list of 28 points to consider when drawing up a partnership agreement.

Intending partners should agree on these points, or other issues identified as being important for the partnership relationship, on the business plan and on management issues before going into a partnership. The items agreed to should be listed for further discussion with your accountant or solicitor.

It is recommended that a solicitor draw up the formal partnership agreement, a copy of which should be retained by each partner.

The partnership agreement should include a process for the resolution of disputes that may arise between the partners.

Caution

Each partner is jointly liable for partnership debts.
Don’t proceed with the proposed partnership if you are uneasy with your proposed role in the business, if you have been unable to resolve problems encountered in the planning stage, or if you have any reservations about your proposed partner(s).
Don’t assume that friends and relatives will make good business partners. A good friend does not necessarily have the personal attributes of a good business person.
Don’t relinquish your responsibilities and duties to other partners.
Run the business as a business - maintain good relationships with your partners. Be prepared to compromise, but don’t let your relationship cloud your business judgement.

Further Information

SBDC's Publications:

Business Structures $5.50
Guide to Operating a Small Business $22.00

The Partnership Act 1891 (WA) from State Law Publishers, 10 William Street, Perth, Telephone: (08) 9321 7688.

Or see the web site www.austlii.edu.au

The section on business structures in the Australian Taxation Office's Complete Tax Guide for Small Business, is available free from the SBDC or the ATO. Website: www.ato.gov.au