If you are starting a business in New Zealand, you will need to determine what sort of business structure you will use. The three main business structures are a sole trader, a partnership and a company. They all serve different purposes and have their own set of unique traits. They also cost differing amounts to set up. A partnership is an easy and inexpensive way to set up your business if you have multiple partners. This article will explain what a partnership is and what documents you need to get started.
What is a Partnership?
A partnership is a business structure in which more than one person is a partner in a business. Generally, a partnership agreement will underpin most partnerships. This will outline the partnership details and specify the rights and responsibilities of everyone privy to the agreement. The partnership agreement will also outline how much capital each shareholder has put into the business and should contain a dispute resolution process. Finally, it will also contain the partnership dissolution process.
Benefits of a Partnership
More than One Shareholder
The main benefit of a partnership is that there is more than one shareholder. This means that the partners can bounce ideas off of each other. Additionally, there is more capital in the business due to there being more shareholders. It also means that all the shareholders split any costs. However, this can also be a disadvantage as you must also share profits between the partners.
Easy to Set Up
Setting up a partnership is also easier than setting up a company. The biggest part of setting up a partnership is drafting a partnership agreement. The only other thing that partnerships need to undertake is telling Inland Revenue that you have set up as a partnership and registering the business for GST if you meet the threshold. You should also get a New Zealand Business Number which is a unique identifier for your business. This will help speed up the process regarding any interaction you have with a government agency.
Limited Regulation
Another benefit of setting up your business as a partnership is that there is limited regulation compared to a company. Companies have a higher set of responsibilities as they are separate legal entities from the individuals that own them. This means that they are under more scrutiny.
The Partnership Law Act 2019 sets out the nature of a partnership, the relationship between the partners and other people, financial reporting obligations, and how you may dissolve a partnership.
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Limited Partnership
A type of partnership law and accounting firms use is a limited partnership. The biggest issue with a standard partnership structure is that the partners have unlimited liability. This means that if the partnership goes insolvent, the partners’ personal assets can be sold to pay off the company’s debts. A limited partnership is a type of partnership with limited liability, meaning that the shareholder’s assets are protected. A partner is only liable to the extent of their capital contribution to the partnership.
It is also different from a partnership because it is a registered entity. The Limited Partnerships Act 2008 applies to limited partnerships. A limited partnership has limited partners (companies or individuals) and a general partner (usually a company).
General partners are liable for all the debts and liabilities of the partnership, and limited partners are liable to the extent of their capital contribution to the partnership.
Key Documents
Partnership Agreement
As mentioned above, the most important document you must create when entering a partnership is a partnership agreement. This should detail all the information relating to the partnership and should ideally be drafted by a lawyer.
If the partnership is a limited partnership, the Limited Partnerships Act 2008 specifies what to include in the partnership agreement.
Key Takeaways
Determining your business structure is important as each structure has different advantages and disadvantages. The industry your business is in and what part of the business life cycle it is in will determine what structure you should choose. Partnership structures are common for law and accounting firms as it allows them to easily bring new partners on and also allow partners to leave without complication. The most common type of partnership is a limited partnership, as it gives the shareholders limited liability, which means their personal assets are protected. There are several key documents that you will have to draft when entering into a partnership, including a partnership agreement and an employment agreement.
If you need help with partnership documents, our experienced corporate 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
Yes, anyone can set up a limited partnership, but you must complete the application process to do so.
There is no fee for setting up a regular partnership, but there is a cost to setting up a limited partnership.
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