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A partnership is an ideal way to operate your business for many people. You can bring together the strengths of each individual to create a more substantial business. However, like any partnership, there may be issues that arise. Developing a solid foundation for the partnership agreement, particularly through creating and registering a partnership agreement, can avoid future disputes or challenges. This article will outline:

  • what a business partnership is;
  • how to set up a business partnership;
  • what needs to be registered to create a business partnership; and
  • what a partnership agreement is.

What is a Business Partnership?

When you enter into a business partnership, you equally share your business’s ownership, control, and profits with your business partners. Additionally, you also share any losses or challenges that the business faces. Business partnerships are commonly used in industries like law and accounting, where it is easy for multiple people to work together and share overall control of a business.

There are several positives and negatives that come from a partnership structure. For example, partners will be liable for each other’s debts. Furthermore, in the case of general partnerships, the partners’ personal assets can be at risk if something goes wrong with the business. However, they also mutually benefit from any profits or achievements of the business. 

What Types of Partnerships Are There?

There are two different types of business partnerships: general and limited partnerships. Whether you should establish a general or limited partnership will depend on how you wish to operate your business.

In a general partnership, partners own and run the business themselves and are personally liable for any debts the business accrues.

However, in a limited partnership, the partners provide financing to the business but are not involved in managing the business. Partners are liable for debts proportionate to the amount they have invested in the business. 

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What Do I Need to Register?

While you do not need to formally register a general business partnership in the same way that you do for a company, there are a few things that you need to do.

Firstly, you need to choose a business name and apply for a New Zealand Business Number. You will also need to register an IRD number for the partnership entity. Next, you will need to file a partnership income tax return for each tax year to show how profits and losses have been distributed to each partner. Then, partners will pay tax individually based on the profits and losses they have received as individuals. Additionally, a partnership will need to register and pay GST if the turnover is more than $60,000 a year. 

Due to its different structure, you will need to register the partnership with the Companies Office for limited partnerships. 

Should I Create a Partnership Agreement?

While you do not need to formally register a business partnership in most cases, you can take some legal steps to avoid future disputes or issues with the business relationship. Creating a partnership agreement when you start operating a new business partnership is useful. This document sets out rules for how the partnership operates and is signed by all partners to become legally binding.

Partnership agreements are beneficial to prevent future disputes or misunderstandings. While these documents are not compulsory to have or register, they are instrumental. Therefore, it is worth putting time into creating one of these documents upfront to avoid complex issues arising down the line. However, unlike general partnerships, you need to have a partnership agreement for a limited partnership. 

Hence, you should ensure your partnership agreement includes:

  • the names of each partner;
  • the roles and responsibilities of each partner;
  • what share each partner holds in the business, and how much they put into the partnership initially;
  • income distribution;
  • partnership dispute resolution; and
  • how partners can exit or sell their portion of the business.

Creating a partnership agreement can be very complex, and it is a good idea to seek legal advice when compiling one to ensure that all bases are covered.

Key Takeaways

Creating a partnership can be a fantastic business structure to develop a successful business. You can benefit from an individual’s strengths while compensating for each other’s weaknesses. However, you must take certain steps when creating a business partnership, such as developing a partnership agreement. This agreement allows for future disputes or challenges to be quickly resolved and allows for taxes and income distribution to be done more efficiently. 

If you need help registering a business partnership, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Does the business partnership pay tax?

No. However, you will need to get an IRD number for your business. The business’s income and losses are distributed to all the partners, who pay individual income tax on this.

Do I need to register my limited partnership?

Yes, you need to register your limited partnership with the Companies Office. This is because limited partnerships have a different structure from general partnerships. In limited partnerships, the partners are less involved in the running of the business. 

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