Three business friends eating a meal and laughing
Unlimited Liability is where each business partner is liable not only for their share of the partnership debts, but also those of the other partners.

Looking for a partner for fun times, financially secure, and broad-minded? (a Business partner that is?)

Perhaps because of the uncertain business climate or the rise of the Gig Economy, more people are deciding to pool their talents and go into business together.

This can take the form of a formal written agreement to work together, or an informal arrangement to work independently but support and preference each other's independent businesses by referring work to each other.

Going into business together is more than just two people with complementary talents "teaming up" to work together.  There will be financial, legal and relational implications to work through first.

Read in this article

Getting to know each other, commercially

Part of evaluating the establishing a formal partnership involves open and frank discussions about core legal issues, finance, debt, responsibilities and expectations - first.

Partnerships, Referrers and Joint Venture partners

Most people team up based on a personal friendship or co-worker relationship.

To thrive, a good business partnership should be grounded in commercial reality and respected as the business relationship it is. Even if a partner is ‘silent’ or there is a 70-30 or 80-20 split, values, goals, and personalities need to be aligned toward profit.

  • Are you going to establish your partnership with a formal Business Partnership Agreement with a clear understanding of roles, responsibilities, and requirements?

OR

  • Are you looking at more of an informal partnership arrangement where each person operates independently with their own business structure but refers clients and business to each other?

Either way, here are some useful issues to discuss and act on today if you're considering going into a formal business partnership - whether that's with friends, family or others.

Get into the habit of practicing proactive communications

Any successful business needs to have one person in charge.

So, the decision of who is responsible for day-to-day business direction needs to be made early on, and everyone in the partnership needs to be 100 percent clear on their roles, duties, and responsibilities.

This involves communication and a healthy amount of planning (and patience).

Looking for a potential business partner?

While the process of setting up a business partnership is relatively straightforward, finding the right business partner to work with is an entirely different ball game.

  • A shared vision for the future and a shared commitment to working through hard times (it's more a when not if) can be a new and yet considered part of life for many people.
  • For some, going into business with family and friends seems to be the next logical thing to do but business with non-arm's length people also brings additional risks, both personal and professional that have to be talked about.

If you're not prepared to talk about that now, why are you going into a partnership?

Here are six factors to consider when evaluating a potential business partner

Have frank discussions about what they bring to the table personally and professionally? Ideally, your future business partner will have a proven track record in an area that's important to your business.

1. Evaluate their personal attributes?

  • What are they like as a person?
  • What is their communication style?
  • How do they manage stress, pressure, and their ongoing personal and mental good health?
  • Do they have stable relationships or volatile and unpredictable relational or family life?
  • Do they have personal Life Insurances and TPD already in place?
  • Do they have their personal estate planning in place? (if this is not done you could end up being in business with their spouse!)
  • What is their attitude towards money? Have they sufficient personal awareness to recognise their own ‘moneyisms’ and potential behavioural money triggers when it comes to exchanging time for money? (this is important as some people have default attitudes they unconsciously bring to a business relationship eg: frugal savers or lavish spenders) - Remember: It's always easier to spend someone's else's money.
  • What is one personal goal they are currently trying to achieve and how?

2. Evaluate their professional attributes

  • Do they have a proven track record of a strong work ethic?
  • Do they regularly read business-related books?
  • Are they a demanding leader or are they a supportive follower? (Or an unstable Jekyll & Hyde combination of the two?)
  • Are they more a technician only interested in doing the work in front of them, or are they a big picture business growth-minded planner?
  • Do they work well by themselves or do they need to consistently work as part of a team?
  • What drives them to work? Is it purpose, money, boredom or excitement or expectation?

3. Evaluate their business attributes

If you already have experience in your chosen industry, you may also want to look for a business partner with additional or complementary skills and experiences such as sales, business development, project management or marketing so they can help grow the business while you focus more on the core business activities.

4. Evaluate their full disclosure

It makes sense to have your lawyer make some standard background searches before you commercially commit yourself to what could be a long and prosperous partnership together.

As a minimum, the following legal searches should be undertaken by all parties to a potential business partnership as part of good business due diligence.

  • National Credit Check
  • National Bankruptcy Check
  • National Criminal records Check (and Working With Children Check, as appropriate)

Pro Tip: Consider completing a joint personality assessment like DiSC or 16P to better understand the anticipated team and communication dynamics or misalignment.

5. Evaluate their financial status

  • When it comes to financial capacity, most people initially focus on being able to fund startup and operational costs but there are a lot more things considered, especially if you have a number of personal sizable assets already held in your own name.
  • Know ahead of time what their financial contribution to the business will be, when and how?
  • Are they bringing assets to the partnership for use? (*It won't be long before a bank tries to convince you of their questionable wisdom to cross-secure your personal assets with business debt and before you know it you may become joint and severally liable).
  • If only one business partner has personal debts and the other has personal assets, this in-balance needs to be addressed in a documented Partnership Agreement.

6. Evaluate your liability tolerance level

Know that your personal assets could be exposed if the business goes into debt or suffers a loss when you're in a business partnership with another.

  • Your business structure and Partnership Agreement.
  • For example is this a 50/50 partnership with equal voting rights and leadership responsibilities or is it something like a 70/30 partnership with varying responsibilities?

Pro Tip: Understand Joint and Several Liability. Joint and Several Liability in a partnership refers to the amount of responsibility each party has undertaken, particularly in case of a conflict. In a joint liability partnership, both partners are fully liable and jointly liable for any debts and obligations of the partnership, for any wrongdoings committed in the ordinary course of business, or with the authority of the other partners, that result in loss or injury to any person or a penalty in incurred on the partnership; a

Insight: A presumption of joint liability may arise in situations where two or more parties have made a promise to perform under an agreement. If this is not the intention of the parties, it should be expressly provided for by clearly stating in an agreement that the parties are ‘severally liable’ or ‘jointly and severally liable’.

Now – document it and make it legal

So if you have gotten this far and your potential business partner looks like the kind of person that will work well with you and your plans - then the next non-negotiable step should be to formally document your core agreements and understanding with a Partnership Agreement. (And yes we can help you with that too).

What's in a Partnership Agreement document?

A documented Partnership Agreement is a written contract between the partners that agrees on the terms of the business relationship.

A Partnership Agreement deals with:

  1. financial reporting responsibilities
  2. agreed responsibilities of the partners
  3. each partner’s financial contribution – (called capital contributions)
  4. an agreed procedure for resolving disputes
  5. an agreed procedure for ending or resigning from the partnership
  6. a partner’s share of the business’s tax losses are offset against other personal income (aka the ‘flow through’ effect).

Insight: An undocumented business partnership is dangerous. Missing this step may even disqualify you from participating in a bigger supply chain as many significant businesses will require a capacity statement to confirm suppliers' business stability and continuity is in place, before accepting you as a supplier.

What are the rules if you don't have a written Partnership Agreement in place?

In Australia, each separate state or territory has its own legislation regulating undocumented Partnerships. If you have no written partnership agreement in place, then you have to rely on out-of-date legislation in each state — (and good luck with that).

You can find the different state-based-partnership legislation below;

The commercial reality for every small business

Risk is a tool to use. Used well it can make a great difference, ignored, not respected and not understood can have equally devastating effects.

A chainsaw can help fell a tree quickly and efficiently; but only depending upon which end of the chainsaw you're holding.

  • Going into business with another can double your ability, reach and increase your profitability. It will also compound your risks and increase your liability, and there are standard business practices and insurance products to help build that safety net under your future plans.
  • Whether you're going into business with another or you're already in business with another, getting your Partnership Agreement documented and in place will make you all sleep better at night. (And your spouse may probably think you have already got this sorted).

Call us today to start that next step.


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Partnership Agreements - clearly set the terms and expectations of a Business Partnership

When you're ready to purchase a Partnership Agreement, give us a Call, or jump the que and complete the introductory details form here and be registered into our Secure Customer portal where you can complete your instructions to our Lawyers and enter your payment details.

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author pic drew browneDrew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.

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