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If you want to set up a business with one or more partners, there are a few options available to you. You should carefully consider how to best structure your business, as this can save you time and money in the future. Notably, you should think about whether a partnership:

  • is the right business structure for you;
  • is the the best way to handle your taxes; and
  • what is involved in setting up one in New Zealand.

This article walks you through the pros and cons of entering into a partnership to help you decide whether it is right for you. It also lists some of the legal and financial implications of choosing this business structure in New Zealand.

What is a Partnership?

In a partnership, you share the ownership, control and profits and losses from your business with at least one other person. Partners often have an equal share in the business, unless this has been structured differently in your partnership agreement.

This structure is appealing to businesses that operate in industries like: 

  • law; 
  • accountancy; and 
  • farming. 

Is it Best to Have a General or Limited Partnership?

Whether you should establish a general or limited partnership will primarily depend on your circumstances. In a general partnership, partners: 

  • generally own and run the business themselves; and 
  • are personally liable for the debts of the business. 

You can also have sleeping partners who invest in the business but do not take part in the everyday decision-making process.

Limited partners, on the other hand, contribute capital to the business but do not take part in managing its operations. In a limited partnership, you are only liable for debts up to the amount that you invest in the business. As with companies, you have: 

  • to register your limited partnerships with the New Zealand Companies Office; and 
  • different legal and tax obligations.

Do You Need a Written Partnership Agreement? 

As in any relationship, partnerships can turn sour pretty quickly and resolving a dispute can be costly. Therefore, it is a good idea to create a partnership agreement before you start carrying out your business activities. This document sets out clear rules for all partners, including:

  • what each partner’s responsibilities are;
  • the share each partner holds in the business;
  • how you will distribute income to each partner; 
  • what property the business owns (such as intellectual property, client lists and premises);
  • how to resolve disputes between partners; and
  • how one or all partners can exit or sell the business.

Unlike a general partnership, you are legally required to have an agreement for limited partnerships. These can be complex documents, so it is a good idea to seek help from a business lawyer. 

Is a Partnership Right for You?

Before you enter into a partnership, you should consider whether you:

  • want to share the responsibilities of owning and running the business with others;
  • are comfortable with putting your personal assets at risk;
  • ddo you plan to sell your business in the future; and
  • will require any large loans or debts for your operations.

For example, suppose you are an accountant looking to start a business, which is unlikely to involve any large costs or debts. If you would like to share the responsibilities of owning and running the business with others, setting up your practice with one or multiple partners could be beneficial for you. You will need to accept personal responsibility for any losses and you may need legal help if you decide to sell your business in the future.

If you are uncertain as to any of the considerations listed above, you should get advice from a lawyer or accountant that specialises in this area. 

Tip: If you manage assets or provide financial services for your clients, you might need to follow new rules designed to detect and prevent money laundering in New Zealand. 

Is a Partnership the Best Way to Handle your Taxes?

A partnership holds an IRD number but it does not pay income tax. However, it is the business, rather than individual partners, who claim any operational expenses you incur.

Partners are subject to personal income tax on their share of the partnership profit. New Zealand individual tax rates are progressive or gradual, which means they increase as your income increases. The top personal tax rate is currently 33% for income over $70,000

From a tax perspective, a general partnership structure may be riskier than a limited one or a company. This is because, as a general partner, you are personally liable for any partnership debts which puts your personal assets at risk. However, depending on your circumstances, you can mitigate this risk through: 

  • looser financial reporting and compliance requirements; and 
  • the ability to offset losses against other personal income. 

A tax lawyer can help you answer these questions and structure your business in the most cost-effective way.  

At the end of each financial year, all partners have to file an individual tax return (IR3) with Inland Revenue (IRD). Additionally, the business has to file a partnership tax return (IR7). 

As with sole trader and company structures, you have to register your partnership and pay GST if you expect to earn more than $60,000 a year.

These requirements can change with updates to government policy. When deciding whether you need to register for GST, always refer to the IRD website or talk to your tax lawyer. 

How to Set Up a Partnership

There are a number of key tasks that you need to do to set yourself up as a partnership. These include:

  • choosing a business name and protecting your IP (you can check if your business name, web domain, trademark and social media usernames are available with One Check);
  • creating a thorough legal agreement;
  • applying for a New Zealand Business Number (NZBN) (there is no additional cost associated with this, all you need is an IRD number and proof of identity);
  • setting aside funds to cover your tax obligations, including GST if you earn over $60,000 a year (the business will need to register for its own IRD number);
  • registering with IRD as an employer if you hire staff (your spouse, de-facto partner or civil union partners require further approval to work in the business);
  • registering with ACC (your levy depends on the type of work that each partner will be doing and there are additional charges for employees); 
  • setting up a business bank account to avoid getting your personal and business expenses mixed up; and
  • deciding on the best system to manage your finances.  

Key Takeaways

Setting up and running your business as a partnership in New Zealand is relatively easy. However, before you choose a structure, consider whether this is the best outcome for you by thinking about the legal and financial implications of your choice. Notably, when you chose this business structure, you share the ownership and control of your business with your partners. You will need to decide whether to structure your partnership as a general or limited one. Finally, it is a good idea to sign a legal agreement to clearly set out the rules for all partners. This will help to avoid disagreements later down the track. If you need help deciding on your company structure or setting up a partnership, contact LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What does business partnership mean?

A partnership is a business structure that allows you to share the ownership, control and profits and losses with other people. A partnership is an alternative to setting up your business as a sole trader or a company.

What is an example of a business partnership?

A partnership structure generally appeals to businesses operating in industries like law, accounting and farming.

What are the advantages of operating a business partnership?

A partnership structure is beneficial if you want to share the responsibilities and costs of running a business with other people. This also allows each partner to focus on their specialty and bring in new business.

How do I set up a business as a partnership?

You can set up a partnership by choosing a business name and applying for an NZBN. You can then register with IRD and notify them that you will hire staff. Finally, you will need to register with ACC and set up a business bank account. It is also a good idea to create a thorough partnership agreement.

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