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A partnership can be a great option to consider when looking at business structures. Having partners can help boost your partnership business’ growth and share the burden of day-to-day management. However, like with any business structure, there can be problems along the way. This article will explain how partnerships work, identify common challenges for partnership businesses and set out how you can manage such challenges. 

How Do Partnerships Work?

A partnership is a way of structuring a business where different parties (either individuals or organisations) form and run a business together. The details of how this works in practice can range widely. A partnership agreement outlines such information, including how partners should divide profits and debts of the business. 

This has positives and negatives. Partners need to trust each other and act in good faith. This is because they are liable for each other’s business debts and any debts for the partnership. There is no limited liability, so partners’ personal assets can be at risk. Therefore, it is very important to choose the right partners to go into business with.

You may also want to consider a limited partnership structure as an alternative.

Partnerships often suit smaller businesses with a tightly-knit group of people. It follows that partnerships are common in professional industries like accountancy and law, where small groups of partners can retain control over the business without the additional requirements of starting a company. The other reason partnerships suit smaller businesses is because a small group of partners can typically know and trust each other more easily than a larger group of people.

However, while partnerships can have their advantages, the structure can present challenges at different points of the business’ growth.

Challenges Around Beginning a Partnership

The best way of resolving problems in your partnership business, both from the start of the partnership into the future, is to have a partnership agreement. This agreement should set out the rules that partners agree to follow. Organising and negotiating a partnership agreement is not mandatory and is sometimes skipped by potential partners keen to get straight into business. However, it is worth investing your time to create one.

Additionally, while partnerships are among the easiest kinds of business structures to set up, there are still some administrative requirements to note. For instance, you need to tell Inland Revenue if you have entered into a partnership. The partnership must hold an IRD number, but it does not pay income tax. Likewise, the partnership must file a partnership income tax return to allocate the profits or losses to its partners.  Partners then declare the profits or losses in their personal income tax return and using their own IRD numbers.

Note that a partnership must register (and pay) GST if its turnover is more than $60,000 a year.

Challenges Around Liability in a Partnership

One of the most serious challenges in a partnership is that each partner is responsible for its debts and liabilities. That means that your personal assets may be at risk, as a partner, if there are problems with the business. Your partnership agreement should outline these possibilities and how you and your partner will resolve them.

These challenges can be hard to manage. However, it is much easier to minimise them when partners operate openly and transparently with each other. All partners should be able to see the business’ finances daily and communicate with each other when there is a potential liability. 

Challenges in Dissolving a Partnership

There can be a range of challenges around dissolving a partnership. Your partnership agreement should detail how jointly owned assets should be divided or split on the partnership’s dissolution. If it does not, and particularly if there is a disagreement between partners, you should immediately seek legal advice. 

It is common for many partnerships to sell the partnership’s assets, satisfy any liabilities from money held by the partnership and the proceeds of the sale of assets. Following this, you can split the balance of proceeds according to each partner’s proportionate share.

Key Takeaways

There are different challenges involved in operating a partnership business in New Zealand. These include how a partnership will operate and how tax works for each partner. Other challenges include shared liability and how to dissolve the partnership. In general, partnerships require a high degree of trust between partners. As partners share debts, liabilities and profits, having a high level of communication and transparency is very important to ensure the business is successful. If you want to know more about partnerships, including drafting a partnership agreement or resolving any problems that have arisen, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is a partnership?

A partnership is when you and another person or organisation partner together and run a business. This is usually set out in a partnership agreement, and partners split any profits and debts from the business.

Do partners in a partnership have to share each other’s business debt?

Yes, partners in a partnership are liable for the partnership’s debts (including any that other partners rack up in the business). However, your partnership agreement can outline these specific details.

What happens to a partnership’s assets when you dissolve your partnership?

The partnership agreement should spell out how you and your partner(s) should divide the  partnership’s assets. It is also common for partners to agree to sell any remaining assets and split the proceedings between them after satisfying any partnership liabilities.

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