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When agreeing to a partnership, is the risk worth it!

 

The word ‘partnership’ is used loosely in business. A partnership arises between persons carrying on a business in common with a view to profit. There are three elements that must be present to form a partnership: (1) carrying on a business; (2) the business is carried out for the mutual benefits of all persons involved; (3) a view to profit. In deciding whether a partnership exists, the courts look at what the parties do in the partnership, not what is said. This means, are the persons who are involved in a partnership carrying out activities jointly with the aim to profit? 

 

Under section 5(1) of the Partnership Act 1958 (Vic) it says: 

 

(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership within the meaning of Part 5 of the Act. 

 

The test for a partnership is whether there has been a sharing of expenses, profits and losses, and if each party involved has a form of authority within the group that forms the partnership. The Partnership Act 1958 (Vic) sets out rules to answer whether there is a partnership under section 6 of the Act. 

 

A partnership may be created orally, in writing, by deed, or by the conduct of the parties. The maximum number of members of a partnership under the Corporations Act 2001 (Cth) section 15 is 20 members. 

 

The Partnership Act 1958 (Vic) sets out the rights and duties of the persons involved in a partnership. Some of these rights and duties include as example: sharing equally in profits and losses; fiduciary obligations; and that every partner may participate in the management. 

 

Each partner is jointly liable for activities of the partnership under contract law. This means, each partner can be sued collectively or individually by a creditor or under a contract, which the partnership has entered into. So the partners can be sued jointly or severally. The risk in this situation is that if one partner enters into an agreement, where other partners are not aware of that contract arrangement, and if that contract results in a debt payable by the partnership, all partners will be liable for the debt amount owing. 

 

Where a person represents themselves as being part of the partnership when they are not, called “holding out” that phantom partner may incur liability as one of the members of the partnership for acts which they represented which results in a claim against the partners.  

 

The main risks with partnerships is that members who are partners have unlimited liability for all debts incurred in the connection with the partnership business. Then if there is insufficient assets of the partnership to payout a liability incurred, the partners may become liable personally, and sued for their personal assets. 

 

Under section 13 of the Partnership Act 1958 (Vic) it says: 

 

Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner, and after his death his estate is also severally liable in due course of administration for such debts and obligations so far as they remain unsatisfied but subject to prior payment of his separate debts. 

 

If the partnership makes agreement for sharing losses in a particular proportion, such as 60%, 30%, 10% for a three member partnership, this arrangement if documented correctly in contract form, will be binding between the members, but not binding with outsiders to the partnership. 

 

Where a new person joins a partnership as a member under section 21(1) of the Partnership Act 1958 (Vic), that member does not become liable to creditors of the firm for anything done before that person became a partner. A partner who retires from the partnership remains liable for debts incurred prior to their retirement under section 21(2) of the Act. The retiring partner can negate this situation by entering into an agreement with the remaining partners that discharge the liability of the retiring partner under section 21(3) of the Act. 

 

The rules that govern a partnership are serious, and if a person is considering entering into a partnership, they should review the Partnership Act 1958 (Vic), or the applicable relevant Act in the residing State to appreciate the risk that is foreseeable. Prudent practice for all partnerships is to have a deed or contract which binds the partners. And before that document is signed by an incoming partner it should be reviewed by a lawyer. So take that proactive step and get that legal advice to protect your legal rights and interests. 

 

The comments in the aforementioned do not constitute legal advice and are general in nature, and if legal advice is required please contact: John Melis at Legal AU Pty Ltd (03) 9999 7799 www.legalau.com 

 

Legal AU Pty Ltd Lawyers are “Liability limited by a Scheme approved under Professional Standards Legislation.”